S-1 1 d572726ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on November 20, 2013

Registration No. 333-            

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

TRINET GROUP, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   7389   95-3359658
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

1100 San Leandro Blvd., Suite 400

San Leandro, CA 94577

(510) 352-5000

(Address, including zip code and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Burton M. Goldfield

Chief Executive Officer

TriNet Group, Inc.

1100 San Leandro Blvd., Suite 400

San Leandro, CA 94577

(510) 352-5000

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Jodie M. Bourdet

Craig D. Jacoby

Andrew S. Williamson

Cooley LLP

101 California Street, 5th Floor

San Francisco, California 94111

(415) 693-2000

 

Gregory L. Hammond

Chief Legal Officer

TriNet Group, Inc.

1100 San Leandro Blvd., Suite 400

San Leandro, CA 94577

(510) 352-5000

 

Gordon K. Davidson

Daniel J. Winnike

Fenwick & West LLP

801 California Street

Mountain View, CA 94041

(650) 988-8500

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   þ  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities to be Registered  

Proposed Maximum
Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee

Common Stock, $0.00005 par value per share

  $250,000,000   $32,200

 

 

(1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes offering price of any additional shares that the underwriters have the option to purchase.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission acting pursuant to said Section 8(a), may determine.

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated November 20, 2013.

Prospectus

            Shares

 

LOGO

Common Stock

This is an initial public offering of shares of common stock of TriNet Group, Inc.

We are offering              shares of our common stock. The selling stockholders identified in this prospectus are offering an additional              shares. We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price per share will be between $         and $        . We intend to list our common stock on the                      under the symbol “            .”

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discount

   $                    $                

Proceeds, before expenses, to TriNet

   $                    $                

Proceeds, before expenses, to the selling stockholders

   $                    $                

                    have granted the underwriters an option to purchase up to an additional                  shares at the initial public offering price, less the underwriting discount.

See “Risk Factors” beginning on page 14 to read about factors you should consider before buying shares of our common stock.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares against payment in New York, New York on                     , 2013.

 

J.P. Morgan    Morgan Stanley    Deutsche Bank Securities
Jefferies    Stifel    William Blair

Prospectus dated                     , 2013


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

The Offering

     8   

Summary Consolidated Financial and Other Data

     10   

Risk Factors

     14   

Special Note Regarding Forward-Looking Statements

     32   

Market, Industry and Other Data

     34   

Use of Proceeds

     35   

Dividend Policy

     36   

Capitalization

     37   

Dilution

     39   

Selected Consolidated Financial and Other Data

     41   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     47   

Business

     85   

Management

     99   

Executive Compensation

     107   

Certain Relationships and Related Person Transactions

     123   

Principal and Selling Stockholders

     124   

Description of Capital Stock

     127   

Shares Eligible for Future Sale

     131   

Material United States Federal Income Tax Consequences to Non-U.S. Holders of Our Common Stock

     133   

Underwriting (Conflicts of Interest)

     136   

Legal Matters

     140   

Experts

     140   

Where You Can Find More Information

     140   

Index to Consolidated Financial Statements

     F-1   

Neither we, the selling stockholders nor the underwriters have authorized anyone to give any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. Neither we, the selling stockholders nor the underwriters take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Through and including                     , 2013 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

Persons who come into possession of this prospectus and any applicable free writing prospectus we have prepared in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions in this offering and the distribution of this prospectus and any such free writing prospectus applicable to that jurisdiction.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should read the entire prospectus carefully, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. Unless the context suggests otherwise, references in this prospectus to “TriNet,” the “Company,” “we,” “us” and “our” refer to TriNet Group, Inc. and, where appropriate, its subsidiaries.

Company Overview

TriNet is a leading provider of a comprehensive human resources solution for small to medium-sized businesses, or SMBs. We enhance business productivity by enabling our clients to outsource their human resources, or HR, function to one strategic partner and allowing them to focus on operating and growing their core businesses. Our HR solution includes services such as payroll processing, human capital consulting, employment law compliance and employee benefits, including health insurance, retirement plans and workers compensation insurance. Our services are delivered by our expert team of HR professionals and enabled by our proprietary, cloud-based technology platform, which allows our clients and their employees to efficiently conduct their HR transactions anytime and anywhere. As of September 30, 2013, we served over 8,000 clients in 47 states, the District of Columbia and Canada and co-employed approximately 218,000 of our clients’ employees, which we refer to as worksite employees, or WSEs. In 2012, we processed over $10 billion in payroll and insurance premiums for our clients.

HR is a mission-critical function for businesses. Businesses of all sizes face increasing levels of complexity in managing HR processes, including regulatory pressures and escalating healthcare costs. These challenges are especially acute for SMBs, which typically lack the scale and capability to solve many of these issues on their own. In 2010, there were approximately 5.7 million employers with 500 or fewer employees. These SMBs employed approximately 55 million people in the United States, or 49% of all U.S. employees, and represented over 99% of all U.S. employers in 2010. We estimate that in 2013, SMBs will spend approximately $90 billion on in-house HR resources, payroll processing and other HR services. We believe that this in-house approach is more challenging for SMBs to manage, and is less effective and more costly as compared to our comprehensive, outsourced solution. Therefore, we believe that this presents a significant opportunity for us to continue to penetrate and expand our presence in the SMB market.

We offer our clients a bundled solution that enables them to outsource their HR function to a single provider. We believe that the combination of our HR professionals, full suite of services, vertical market orientation, broad geographic reach and powerful technology platform enables us to solve the HR challenges of our SMB clients. Our solution helps reduce the complexity, cost and risk of managing the HR function for our SMB clients while helping SMBs better retain their employees. In addition, our tailored approach allows us to serve a diverse range of industries with varying levels of HR requirements. For our clients’ employees, we provide access to high-caliber, big-company benefits, timely payroll processing and anytime and anywhere system access. We are also able to leverage our strong and diverse partner relationships to provide a broad and rich suite of services and benefits for our clients and their employees. We believe that this provides us with a highly referenceable customer base that allows us to further penetrate our target vertical markets.

Our proprietary, cloud-based technology platform and our team of HR professionals make HR transactions simple, seamless and efficient for employers and employees. Our platform is designed to function as the core system of record for all of our clients’ HR activities and allows our clients to enjoy 24/7, ubiquitous access. Our platform is also highly scalable, allowing us to efficiently add new clients and grow with our existing clients.

We sell our services primarily through our direct sales force, which we align around target vertical markets, including technology, life sciences, property management, professional services, banking and financial services,

 

 

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retail, manufacturing and hospitality services. We believe that our vertical market expertise and tailored service offerings differentiate us in the market and allow us to compete more effectively.

Our total revenues consist of professional service revenues and insurance service revenues. For 2012 and the nine months ended September 30, 2013, 15% and 17% of our total revenues, respectively, consisted of professional service revenues, and 85% and 83% of our total revenues, respectively, consisted of insurance service revenues. We earn professional service revenues by processing HR transactions, such as payroll and employment tax withholding, and providing labor and benefit law compliance services, on behalf of our clients. We earn insurance service revenues by providing risk-based, third-party plans to our clients, primarily employee health benefit plans and workers compensation insurance.

For professional service revenues, we recognize as revenues the fees we earn for processing HR transactions, which fees do not include the payroll that is paid to us by the client and paid out to WSEs or remitted as taxes. We recognize as insurance service revenues all insurance-related billings and administrative fees collected from clients and withheld from WSEs for risk-based insurance plans provided through third-party insurance carriers, primarily employee health insurance and workers compensation insurance. We in turn pay premiums to third-party insurance carriers for these insurance benefits, as well as reimburse them for claim payments within our insurance deductible layer. These premiums and reimbursements are classified as insurance costs on our statements of operations. To augment our financial information prepared in accordance with U.S. generally accepted accounting principles, or GAAP, we use internally a non-GAAP financial measure, Net Insurance Service Revenues, which consists of insurance service revenues less insurance costs. We also use a measure of total non-GAAP revenue, or Net Service Revenues, which is the sum of professional service revenues and Net Insurance Service Revenues. For 2012 and the nine months ended September 30, 2013, 55% and 66% of our Net Service Revenues, respectively, consisted of professional service revenues and 45% and 34% of our Net Service Revenues, respectively, consisted of Net Insurance Service Revenues.

We have grown our business organically and through strategic acquisitions. For 2010, 2011 and 2012, our total revenues were $906.2 million, $840.4 million and $1.0 billion, respectively, our Net Service Revenues were $192.5 million, $189.3 million and $269.0 million, respectively, and our net income (loss) was $(9.6 million), $15.5 million and $31.8 million, respectively. For the nine months ended September 30, 2012 and 2013, our total revenues were $696.9 million and $1.2 billion, respectively, our Net Service Revenues were $178.5 million and $296.0 million, respectively, and our net income was $23.0 million and $7.1 million, respectively. For 2010, 2011 and 2012, our Adjusted EBITDA was $29.8 million, $47.3 million and $95.4 million, respectively. For the nine months ended September 30, 2012 and 2013, our Adjusted EBITDA was $61.5 million and $92.3 million, respectively.

Our Market Opportunity

We serve the HR needs of SMBs in the U.S. The growing complexity of managing HR processes today presents a significant challenge for SMBs. Traditionally, SMBs have managed HR processes in-house through a range of separately delivered services rather than seeking a holistic and comprehensive solution, which we believe has further aggravated many of these challenges. We believe that a bundled HR solution better addresses these needs and allows SMBs to focus in-house resources on business operations instead of managing HR activities. As a result, we believe that this represents a significant opportunity for TriNet’s solution.

Large and Underpenetrated Market.    SMBs employ a large percentage of the total employee base in the U.S. today. According to the U.S. Census Bureau, in 2010, approximately 55 million employees were employed by organizations with fewer than 500 employees, representing approximately 49% of U.S. employees. These SMBs comprised approximately 5.7 million business organizations, representing over 99% of U.S. employers. Though smaller, these companies have HR needs similar to their larger counterparts, including payroll, employee benefits and many other HR services for employees, and spend significant amounts on managing these processes. We estimate that in 2013 SMBs will spend approximately $90 billion in providing HR services, and that most of

 

 

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this spending will be on in-house resources. Based on data published by the National Association of Professional Employer Organizations, we estimate that in 2012 fewer than 5% of U.S. employees of businesses with fewer than 500 employees were part of a co-employment arrangement, in which all or some portion of the employer’s HR function was outsourced to a single third-party provider such as TriNet. We believe that our growth opportunity is primarily a function of our ability to increase our penetration of the SMB market.

HR Management Increasing in Complexity.    The HR function is becoming increasingly complex. The scope of responsibilities and demands on HR departments continues to expand beyond the management of payroll and benefits as firms compete to attract, retain and motivate employees. In addition, external pressures continue to mount as firms must deal with the increased complexity of the laws and regulations that govern the provision and administration of HR services, including effectively managing multiple and disparate state and federal laws and regulations. As a recent example, the Patient Protection and Affordable Care Act, enacted in March 2010, imposes a staggered schedule of sweeping health care reforms, which began in 2010 and will continue through 2018, and which will put increased burdens on many employers.

Challenges Are Especially Acute for SMBs.    SMBs typically confront an array of challenges as they seek to address increasingly complex HR requirements. These organizations frequently lack the dedicated and specialized personnel and systems that are necessary to provide complex HR solutions. According to The Bureau of National Affairs, Inc., in 2013, 39% of the smallest (fewer than 250 workers) organizations surveyed do not have an HR specialist on staff. Conversely, 90% of the largest (more than 2,500 workers) organizations surveyed have at least one employee devoted to just one or two areas of HR. Additionally, a large portion of HR-related spending by SMBs has traditionally been on a range of disparate products and services, where companies utilize a combination of third-party service and technology providers and in-house resources to administer the HR function. We believe that this approach of utilizing a combination of various third-party providers further complicates the delivery of HR services, dilutes the benefit that HR processes can have on an organization, and is typically more costly than a bundled solution. Lastly, SMBs typically cannot afford to invest in a comprehensive technology platform to manage their HR processes and often lack the scale required to negotiate favorable employee health benefit and workers compensation plan terms with insurance companies and other large employee benefits providers. As a result, we believe that SMBs will increasingly look to a bundled solution to help solve these issues.

Our Solution

We offer our clients a bundled solution that enables them to outsource their HR function to one strategic partner, so they can focus on operating and growing their core businesses. Our bundled solution, which includes services such as payroll processing, human capital consulting, employment law compliance and employee benefits, including health insurance, retirement plans and workers compensation insurance, holistically addresses the HR needs of both our clients and their employees. For each of our clients, we offer timely payroll processing and access to a team of HR professionals with specific knowledge of its industry to help reduce the complexity, cost and risk of managing the HR function, while helping them better retain their workforce. For employees, we provide access to high-caliber, big-company benefits and other services such as expert HR guidance and anytime, anywhere access to comprehensive HR information and services. We leverage our strong and diverse partner relationships to provide a broad and rich suite of services for our clients and their employees.

 

 

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LOGO

We serve a number of large vertical markets. Businesses in these vertical markets have HR requirements that vary across two primary dimensions: (1) the complexity of HR needs and (2) the importance of employee benefits and a high touch service experience. We believe that our ability to address our target vertical markets across these dimensions is a clear competitive differentiator.

Our vertical market expertise allows us to tailor our services for our target industries, which helps to further embed us within our clients and helps us to deliver meaningful business impact. Our solution is delivered by a team of HR professionals with expertise in our clients’ industries, enabled by our proprietary, cloud-based technology platform, which simplifies the day-to-day HR transactions of our clients and their employees. Our platform provides SMBs with the knowledge and features of large-business support and technology, as well as anywhere and any-device access to their HR systems. Our platform is also highly scalable, allowing our clients to efficiently add new employees and us to grow with our existing clients. Its seamless integration with partner systems allows single-sign-on functionality that enhances the employee and employer experience.

Our Competitive Advantages

We believe that we have the following key competitive advantages:

Comprehensive Suite of HR Capabilities.    We are the strategic HR partner to our clients. Our innovative bundled solution, developed over our 25-year operating history, allows our clients to outsource their HR function to a single provider in an effective and cost-efficient manner. As the provider of a bundled solution, we deliver our services in a coordinated and comprehensive manner, which provides significant value to our clients by reducing the complexity of managing the HR function. The services that we provide are delivered through a combination of HR professionals and our proprietary, cloud-based technology platform. Each TriNet client is guided by a team of HR professionals with expertise in both complex and day-to-day HR questions and challenges, ensuring a high level of customer service and attention throughout the client’s organization. In

 

 

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addition to our HR services such as payroll processing and human capital consulting, we also offer our clients and their employees access to a broad range of big-company employee benefits plans, and our risk management tools allow us to significantly mitigate employer risk, such as compliance, legal and related risks, including workers compensation and employee practices liability insurance.

Deep Vertical Market Expertise.    We focus on serving clients in specific industry vertical markets. We have developed deep expertise around the HR functions within our target industries, which enables us to provide our clients with a solution tailored to the industries in which they operate. Our direct sales force and go-to-market strategy is aligned with these vertical markets, which enhances our client value proposition and allows us to leverage our strong institutional knowledge to further expand our presence within these target industries. We believe that this verticalized approach allows us to target clients across a range of industries in which SMBs have varying levels of need for services based on the complexity of their HR environment and required employee experience.

Proprietary, Cloud-Based Technology Platform.    Our proprietary, cloud-based technology platform enables our clients and their employees to conduct their HR transactions anytime and anywhere. Our platform offers online self-service tools for managing employee payroll, creating compensation reports, managing employee hiring and termination and managing health benefits. As a result of our long-standing partnerships and the significant investments that we have made in our platform, our technology and benefits services partners are able to integrate their systems with our platform, allowing employees to access a unified view of all of their pertinent HR information. In addition, our platform allows clients to leverage information about their workforce in real time to keep tactical HR demands under control. Our platform is also highly scalable, which allows our clients to efficiently add new employees.

Scale.    We are able to leverage our national presence and large WSE base to provide a comprehensive and cost-effective solution to our clients. SMBs typically lack the scale required to negotiate favorable employee health benefit plan prices and other features with insurance companies and other large employee benefits providers. Leveraging the economies of scale arising from serving approximately 218,000 WSEs, we are able to make significant investments in our technology platform and are typically able to secure a broader range of benefits plans at rates and with features that are more competitive than those that an SMB would be able to procure on its own. In addition, our scale has allowed us to specialize our workforce by industry vertical markets and deliver more relevant services to our clients.

Strong Strategic Partnerships.    We have developed strong relationships with our insurance and risk management partners, as well as other vendors and suppliers, which we believe enable us to provide a broader array of services to our clients and their employees more cost-effectively than if they attempted to purchase these offerings themselves. We have long-standing relationships with large health benefits insurers, such as Aetna, Blue Shield of California, Blue Cross and Blue Shield of Florida, Kaiser Permanente, MetLife and United Healthcare, as well as retirement plan providers, such as Transamerica Retirement Services and MassMutual. We believe that we are a valuable partner for our insurance and other service vendors, as we provide them with an attractive channel to the hard-to-reach SMB market through our large scale presence across the U.S. and Canada, and across a wide range of industry vertical markets.

Our Growth Strategies

Our goal is to become the leading HR solutions provider to SMBs. Our strategies to achieve that goal include the following:

 

   

Continue to Penetrate the SMB Market Using Our Vertical Market Approach.    Our focus on serving clients in specific industry vertical markets has given us deep, substantive knowledge of the HR needs facing SMBs in those industries. This enables us to provide a bundled solution of services to each client that is tailored to its specific needs and better enables us to attract sales professionals with industry expertise. We intend to continue this focus on industry vertical markets. We also regularly assess

 

 

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additional and new industry vertical markets and intend to add them, either through acquisition or internal development, selectively based on what we believe the market opportunity is.

 

   

Expand Our Direct Sales Force.    We believe that the SMB market remains significantly underpenetrated for a bundled HR solution such as ours. We intend to continue to invest in our direct sales force to enable us to identify and acquire new clients across our target vertical markets, in addition to expanding our sales force to target new vertical markets.

 

   

Grow With Our Clients by Enhancing the Breadth and Quality of Our Services.    We intend to continue to expand the breadth and quality of our HR solution. We believe that this will allow us to continue to enhance the value proposition for our clients and to grow with them by providing additional high-quality service offerings.

 

   

Continue to Enhance Our Technology Platform.    We intend to continue to invest in and improve our proprietary, cloud-based technology platform, including mobile applications, in order to provide our clients with enhanced features and functionality with which to conduct their HR transactions, manage employees and analyze employee benefits data. This may include acquiring or developing additional functionality or technology.

 

   

Continue to Grow Through Strategic Acquisitions.    We have successfully completed numerous strategic acquisitions over the course of the past decade, which has allowed us to enhance and expand our presence in both existing and new target industries as well as expand our solution and technology platform. We intend to continue to pursue strategic acquisitions that will enable us to leverage our existing assets and offer our clients more comprehensive and attractive services.

Risks Associated with Our Business

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. Some of these risks are:

 

   

our success depends on growth in market acceptance of the HR outsourcing and related services we provide;

 

   

if we are unable to rapidly grow our sales force, we will not be able to grow our business at the rate that we anticipate, which could harm our business, results of operations and financial condition;

 

   

we are subject to client attrition;

 

   

our acquisition strategy creates risks for our business;

 

   

unexpected changes in workers compensation and health insurance claims by worksite employees could harm our business;

 

   

our quarterly results of operations may fluctuate as a result of numerous factors, many of which are outside of our control;

 

   

our business is subject to numerous state and federal laws, and uncertainty as to the application of these laws, or adverse applications of these laws, as well as changes in applicable laws, could adversely affect our business;

 

   

if we are not recognized as an employer of worksite employees under federal and state regulations, we and our clients could be adversely impacted;

 

   

we and our clients could be adversely impacted by health care reform;

 

   

we may have additional tax liabilities, which could harm our business, operating results, financial condition and prospects;

 

 

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our business and operations have experienced rapid growth in recent periods, and if we are unable to effectively manage this growth, our business and results of operations may suffer;

 

   

we may not be able to sustain our revenue growth rate or profitability in the future;

 

   

our industry is highly competitive, which may limit our ability to maintain or increase our market share or improve our results of operations;

 

   

adverse changes in our relationships with key vendors could impair the quality of our solution;

 

   

we depend on licenses to third-party software in order to provide our services; and

 

   

we have a substantial amount of indebtedness, which could adversely affect our financial condition and our operating flexibility.

Corporate Information

We were incorporated in 1988 as TriNet Employer Group, Inc., a California corporation. We reincorporated as TriNet Group, Inc., a Delaware corporation, in 2000. Our principal executive offices are located at 1100 San Leandro Blvd., Suite 400, San Leandro, CA 94577 and our telephone number is (510) 352-5000. Our website address is www.trinet.com. Information contained on or accessible through our website is not a part of this prospectus and should not be relied upon in determining whether to make an investment decision.

TriNet, TriNet Group, SOI, Ambrose, Accord and ExpenseCloud and their associated logos and other trade names, trademarks or service marks of TriNet appearing in this prospectus are the property of TriNet. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective holders.

 

 

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THE OFFERING

 

Common stock offered by TriNet

            shares

 

Common stock offered by the selling stockholders

            shares

 

Common stock to be outstanding after this offering

            shares

 

Option to purchase additional shares of common stock offered by

            shares

 

Use of proceeds

We estimate that our net proceeds from this offering will be approximately $         million, based on an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We intend to use the net proceeds to us from this offering to repay approximately $200 million of indebtedness outstanding under our credit facilities and for working capital and other general corporate purposes. We may also use a portion of the net proceeds from this offering for acquisitions of, or investments in, technologies, assets or businesses that complement our business, although we have no present commitments or agreements to enter into such acquisitions or investments. We will not receive any of the proceeds from the sale of shares to be offered by the selling stockholders. See “Use of Proceeds” for additional information.

 

Risk factors

See “Risk Factors” beginning on page 14 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

Proposed              symbol

The number of shares of common stock to be outstanding after this offering is based on 26,449,910 shares of our common stock (including preferred stock on an as-converted basis) outstanding as of September 30, 2013, and excludes:

 

   

3,343,372 shares of common stock issuable upon the exercise of outstanding stock options as of September 30, 2013 pursuant to our 2000 Equity Incentive Plan, or our 2000 Plan, and our 2009 Equity Incentive Plan, or our 2009 Plan, at a weighted average exercise price of $2.85 per share;

 

   

3,266 shares of common stock issuable upon the settlement of restricted stock units as of September 30, 2013 pursuant to our 2009 Plan;

 

   

             shares of common stock issuable upon the exercise of outstanding stock options issued after September 30, 2013 pursuant to our 2009 Plan at a weighted average exercise price of $        ;

 

   

                 shares of common stock to be reserved for future issuance under our 2009 Plan, as amended in connection with this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this benefit plan; and

 

   

             shares of common stock to be reserved for issuance under our 2013 Employee Stock Purchase Plan, or our ESPP, to be effective in connection with this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this benefit plan.

 

 

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In addition, unless we specifically state otherwise, all information in this prospectus assumes:

 

   

that the two-for-one split of our common stock that occurred in July 2013 occurred as of the first date presented in this prospectus;

 

   

the conversion of all outstanding shares of our preferred stock into an aggregate of 19,032,854 shares of common stock immediately prior to the completion of this offering;

 

   

no exercise of options outstanding;

 

   

no exercise of the underwriters’ option to purchase up to an additional             shares of common stock from             ; and

 

   

the filing of our amended and restated certificate of incorporation in Delaware and the adoption of our amended and restated bylaws, each of which will occur immediately prior to the completion of this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables summarize our consolidated financial and other data. You should read this summary consolidated financial and other data together with the sections titled “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as our consolidated financial statements and related notes included elsewhere in this prospectus.

We have derived the consolidated statement of operations data for the years ended December 31, 2010, 2011 and 2012 from our audited consolidated financial statements that are included elsewhere in this prospectus. We have derived the unaudited consolidated statement of operations data for the nine months ended September 30, 2012 and 2013 and the unaudited consolidated balance sheet data as of September 30, 2013 from our unaudited consolidated financial statements that are included elsewhere in this prospectus. Our unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which consist only of normal recurring adjustments, necessary for the fair statement of those unaudited consolidated financial statements. Our historical results are not necessarily indicative of the results that should be expected in the future, and our interim results are not necessarily indicative of the results that should be expected for the full year or any other period.

 

 

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     Year Ended December 31,     Nine Months Ended
September 30,
 
    2010     2011     2012     2012     2013  
    (in thousands, except share and per share data)  

Consolidated Statement of Operations Data:

         

Professional service revenues

  $ 139,495      $ 113,279      $ 148,233      $ 94,892      $ 195,642   

Insurance service revenues

    766,695        727,111        870,828        601,967        959,246   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    906,190        840,390        1,019,061        696,859        1,154,888   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and operating expenses:

         

Insurance costs

    713,653        651,094        750,025        518,386        858,862   

Cost of providing services (exclusive of depreciation and amortization of intangible assets)(1)

    72,073        59,388        63,563        44,944        74,042   

Sales and marketing(1)

    46,454        38,087        59,931        39,377        79,387   

General and administrative(1)

    28,366        31,421        37,879        24,147        39,821   

Systems development and programming costs(1)

    15,045        15,646        16,718        11,893        15,140   

Amortization of intangible assets

    17,960        12,388        17,441        7,853        35,926   

Depreciation

    12,042        9,201        11,676        9,100        8,908   

Restructuring

    5,922        2,358                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

    911,515        819,583        957,233        655,700        1,112,086   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (5,325     20,807        61,828        41,159        42,802   

Other income (expense):

       

Interest expense

    (4,444     (751     (9,709     (2,835     (32,091

Other, net

    67        127        57        22        309   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for (benefit from) income taxes

    (9,702     20,183        52,176        38,346        11,020   

Provision for (benefit from) income taxes

    (100     4,646        20,344        15,386        3,880   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (9,602   $ 15,537      $ 31,832      $ 22,960      $ 7,140   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stock:

       

Basic

  $ (2.58   $ 0.68      $ 1.33      $ 0.97      $ 0.29   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (2.58   $ 0.65      $ 1.26      $ 0.92      $ 0.27   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common stock outstanding:

         

Basic

    3,727,195        3,921,341        4,902,692        4,728,686        5,750,789   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    3,727,195        5,051,990        6,238,046        6,002,628        7,598,197   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share:

         

Basic

      $ 1.33        $ 0.29   
     

 

 

     

 

 

 

Diluted

      $ 1.26        $ 0.27   
     

 

 

     

 

 

 

Pro forma weighted average shares of common stock outstanding:

         

Basic

        23,935,546          24,783,643   
     

 

 

     

 

 

 

Diluted

        25,270,900          26,631,051   
     

 

 

     

 

 

 

 

 

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     Year Ended December 31,      Nine Months Ended
September 30,
 
     2010      2011      2012      2012      2013  

Key Operating Metrics and Other Financial Data:

              

Total WSEs(2)

     96,816         83,314         174,311         104,747         218,069   

Total Sales Representatives(3)

     114         80         224         149         301   

Net Insurance Service Revenues (in thousands)(4)

   $ 53,042       $ 76,017       $ 120,803       $ 83,581       $ 100,384   

Net Service Revenues (in thousands)(5)

   $ 192,537       $ 189,296       $ 269,036       $ 178,473       $ 296,026   

Adjusted EBITDA (in thousands)(6)

   $ 29,797       $ 47,348       $ 95,362       $ 61,530       $ 92,305   

Adjusted Net Income (in thousands)(7)

   $ 13,174       $ 28,788       $ 45,133       $ 29,695       $ 33,242   

 

(1) Includes stock-based compensation expense as follows:

 

     Year Ended December 31,      Nine Months Ended
September 30,
 
     2010      2011      2012      2012      2013  
     (in thousands)  

Cost of providing services (exclusive of depreciation and amortization of intangible assets)

   $ 467       $ 438       $ 516       $ 382       $ 770   

Sales and marketing

     670         637         500         364         882   

General and administrative

     3,385         3,590         3,144         2,505         2,371   

Systems development and programming costs

     531         160         200         145         337   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 5,053       $ 4,825       $ 4,360       $ 3,396       $ 4,360   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) We define Total WSEs at the end of a given fiscal period as the total number of WSEs paid in the last calendar month of the fiscal period. For more information about Total WSEs, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating Metrics.”

 

(3) We define Total Sales Representatives at the end of a given fiscal period as the total number of our direct sales force employees at that date. For more information about Total Sales Representatives, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating Metrics.”

 

(4) Net Insurance Service Revenues is a non-GAAP financial measure that we calculate as insurance service revenues less insurance costs. For more information about Net Insurance Service Revenues and a reconciliation of Net Insurance Service Revenues to insurance service revenues, the most directly comparable financial measure calculated and presented in accordance with GAAP, see “Selected Consolidated Financial and Other Data—Non-GAAP Financial Results.”

 

(5) Net Service Revenues is a non-GAAP financial measure that we calculate as the sum of professional service revenues and Net Insurance Service Revenues. For more information about Net Service Revenues and a reconciliation of Net Service Revenues to total revenues, the most directly comparable financial measure calculated and presented in accordance with GAAP, see “Selected Consolidated Financial and Other Data—Non-GAAP Financial Results.”

 

(6) Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss) excluding the effects of our income tax provision (benefit), interest expense, depreciation, amortization of intangible assets, and stock-based compensation expense. For more information about Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP, see “Selected Consolidated Financial and Other Data—Non-GAAP Financial Results.”

 

(7) Adjusted Net Income is a non-GAAP financial measure that we calculate as net income (loss), excluding the effects of stock-based compensation, amortization of intangible assets and the income tax effect of these pre-tax adjustments at our effective tax rate. For more information about Adjusted Net Income and a reconciliation of Adjusted Net Income to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP, see “Selected Consolidated Financial and Other Data—Non-GAAP Financial Results.”

 

 

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      As of September 30, 2013
     Actual     Pro Forma(1)     Pro Forma
As
Adjusted(2)(3)
     (in thousands)

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 112,161      $ 112,161     

Working capital

   $ 85,541      $ 85,541     

Total assets

   $ 1,215,597      $ 1,215,597     

Notes payable and borrowings under capital leases

   $ 820,610      $ 820,610     

Total liabilities

   $ 1,448,163      $ 1,448,163     

Convertible preferred stock

   $ 122,878            

Total stockholders’ equity (deficit)

   $ (355,444   $ (232,566  

 

(1) The pro forma column reflects the conversion of all outstanding shares of our preferred stock into 19,032,854 shares of our common stock immediately prior to the completion of this offering.

 

(2) The pro forma as adjusted column reflects the (i) conversion of all outstanding shares of our preferred stock into 19,032,854 shares of our common stock immediately prior to the closing of this offering, (ii) sale by us of              shares of our common stock in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and (iii) the application of $200 million of the net proceeds of this offering to repay amounts outstanding under our credit facilities.

 

(3) A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the amount of cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $          million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares of our common stock offered by us would increase (decrease) the amount of cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $         million, assuming that the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and the other terms of this offering determined at pricing.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and all of the other information contained in this prospectus, including our consolidated financial statements and related notes, before investing in our common stock. While we believe that the risks and uncertainties described below are the material risks currently facing us, additional risks that we do not yet know of or that we currently think are immaterial may also arise and materially affect our business. If any of the following risks materialize, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.

Risks Related to Our Business and Industry

Our success depends on growth in market acceptance of the human resources outsourcing and related services we provide.

Our success depends on the willingness of SMBs to outsource their HR function to a third-party service provider. Based on data published by the National Association of Professional Employer Organizations, we estimate that in 2012 fewer than 5% of U.S. employees of businesses with fewer than 500 employees were part of a co-employment arrangement, in which all or some portion of the employer’s HR function was outsourced to a single third-party provider such as TriNet. We believe that our growth opportunity is primarily a function of our ability to penetrate the SMB market. Many companies have invested substantial personnel, infrastructure and financial resources in their own internal HR organizations and therefore may be reluctant to switch to our solution. Companies may not engage us for other reasons, including a desire to maintain control over all aspects of their HR activities, a belief that they manage their HR activities more effectively using their internal administrative organizations, perceptions about the expenses associated with our services, perceptions about whether our services comply with laws and regulations applicable to them or their businesses, or other considerations that may not always be evident. Additional concerns or considerations may also emerge in the future. We must address our potential clients’ concerns and explain the benefits of our approach in order to convince them to change the way that they manage their HR activities, particularly in parts of the United States where our company and solution are less well-known. If we are not successful in addressing potential clients’ concerns and convincing companies that our solution can fulfill their HR needs, then the market for our solution may not develop as we anticipate and our business may not grow.

If we are unable to rapidly grow our sales force, we will not be able to grow our business at the rate that we anticipate, which could harm our business, results of operations and financial condition.

In order to raise awareness of the benefits of our services and identify and acquire new clients, we must rapidly grow our direct sales force, which consists of regional sales representatives who focus on serving clients in specific industry vertical markets. Competition for skilled sales personnel is intense, and we cannot assure you that we will be successful in attracting, training and retaining qualified sales personnel, or that our newly hired sales personnel will function effectively, either individually or as a group. In addition, our newly hired sales personnel are typically not productive for up to a year following their hiring. This results in increased near-term costs to us relative to the sales contributions of these newly hired sales personnel. If we are unable to rapidly grow and effectively train our sales force, our revenues likely will not increase at the rate that we anticipate, which could harm our business, results of operations and financial condition.

We are subject to client attrition.

We regularly experience significant client attrition due to a variety of factors, including increases in administrative fees and insurance costs, disruption caused by the transition of WSEs we have gained through acquisition to our technology platform, client business failure, competition and clients determining to bring HR administration in-house. Our standard client service agreement can be cancelled by us or by the client without penalty with 30 days’ prior written notice. Clients who intend to cease doing business with us often elect to do so effective as of the beginning of a calendar year. As a result, in the first quarter of each year we experience our

 

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largest concentration of client attrition. In addition, we experience higher levels of client attrition in connection with renewals of the health insurance we provide for WSEs in the event that such renewals result in increased premiums that we pass on to our clients. If we were to experience client attrition in excess of our planned annual attrition rate of approximately 20% of our installed WSE base, as we did in 2010 and 2011, it could harm our business, results of operations and financial condition.

Our acquisition strategy creates risks for our business.

We have completed numerous acquisitions of other businesses, and we expect that we will continue to grow through acquisitions of other businesses, assets or technologies. We may fail to identify attractive acquisition candidates or we may be unable to reach acceptable terms for future acquisitions. If we are unable to complete acquisitions in the future, our ability to grow our business will be impaired.

We may pay for acquisitions by issuing additional shares of our common stock, which would dilute our stockholders, or by issuing debt, which could include terms that restrict our ability to operate our business or pursue other opportunities and subject us to meaningful debt service obligations. We may also use significant amounts of cash to complete acquisitions. To the extent that we complete acquisitions in the future, we likely will incur future depreciation and amortization expenses associated with the acquired assets. We may also record significant amounts of intangible assets, including goodwill, which could become impaired in the future. Acquisitions involve numerous other risks, including:

 

   

difficulties integrating the operations, technologies, services and personnel of the acquired companies, including the migration of WSEs from an acquired company’s technology platform to ours;

 

   

challenges maintaining our internal standards, controls, procedures and policies;

 

   

diversion of management’s attention from other business concerns;

 

   

over-valuation by us of acquired companies;

 

   

litigation resulting from activities of the acquired company, including claims from terminated employees, customers, former stockholders and other third parties;

 

   

insufficient revenues to offset increased expenses associated with the acquisitions and unanticipated liabilities of the acquired companies;

 

   

insufficient indemnification or security from the selling parties for legal liabilities that we may assume in connection with our acquisitions;

 

   

entering markets in which we have no prior experience and may not succeed;

 

   

risks associated with foreign acquisitions, such as communication and integration problems resulting from geographic dispersion and language and cultural differences, compliance with foreign laws and regulations and general economic or political conditions in other countries or regions;

 

   

potential loss of key employees of the acquired companies; and

 

   

impairment of relationships with clients and employees of the acquired companies or our clients and employees as a result of the integration of acquired operations and new management personnel.

If we fail to integrate newly acquired businesses effectively, we might not achieve the growth, service enhancement or operational efficiency objectives of the acquisitions, and our business, results of operations and financial condition could be harmed.

Unexpected changes in workers compensation and health insurance claims by worksite employees could harm our business.

Our insurance costs are impacted significantly by our WSEs’ health and workers compensation insurance claims experience. We establish reserves to provide for the estimated costs of reimbursing our workers

 

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compensation and health insurance carriers for paying claims within the deductible layer in accordance with their insurance policies. Estimating these reserves involves our consideration of a number of factors and requires significant judgment. If there is an unexpected increase in the severity or frequency of claims, such as due to our WSEs generating additional claims activity, or if we subsequently receive updated information indicating insurance claims were higher than previously estimated and reported, our insurance costs could be higher in that period or subsequent periods as we adjust our reserves accordingly. In addition, we may be unable to increase our pricing to offset increases in insurance costs on a timely basis. A number of factors affect claim activity levels, such as changes in general economic conditions, proposed and enacted regulatory changes and disease outbreaks.

Our quarterly results of operations may fluctuate as a result of numerous factors, many of which are outside of our control.

Our quarterly results of operations are likely to fluctuate, and our results in some quarters may be below the expectations of research analysts and our investors, which could cause the price of our common stock to decline. Some of our significant expenses, such as insurance costs for our WSEs, rent expense and debt expense, may require significant lead time to reduce. If we do not achieve our expected revenues targets, we may be unable to adjust our costs quickly enough to offset any revenues shortfall, which could harm our results of operations. Some of the important factors that may cause our revenues, results of operations and cash flows to fluctuate from quarter to quarter include:

 

   

the number of our new clients initiating service and the number of WSEs employed by each new client;

 

   

our loss of existing clients;

 

   

reduction in the number of WSEs at existing clients;

 

   

the number and severity of health and workers compensation insurance claims by WSEs and updates to claims information provided by our insurance carriers;

 

   

the timing of client payments and payment defaults by clients;

 

   

the amount and timing of our operating expenses and capital expenditures;

 

   

costs associated with our acquisitions of companies, assets and technologies;

 

   

expenses we incur for geographic and service expansion;

 

   

our regulatory compliance costs;

 

   

changes to our credit ratings by rating agencies;

 

   

changes in our effective tax rate;

 

   

extraordinary expenses such as litigation or other dispute-related settlement payments; and

 

   

the impact of new accounting pronouncements.

Many of the above factors are discussed in more detail elsewhere in this “Risk Factors” section and in the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Many of these factors are outside our control, and the variability and unpredictability of these factors could cause us to fail to meet our expectations for revenues or results of operations for a given period. In addition, the occurrence of one or more of these factors might cause our results of operations to vary widely, which could lead to negative impacts on our margins, short-term liquidity or ability to retain or attract key personnel, and could cause other unanticipated issues. Accordingly, we believe that quarter-to-quarter comparisons of our revenues, results of operations and cash flows may not be meaningful and should not be relied upon as an indication of our future performance.

 

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Our business is subject to numerous state and federal laws, and uncertainty as to the application of these laws, or adverse applications of these laws, as well as changes in applicable laws, could adversely affect our business.

Our operations are governed by numerous federal, state and local laws relating to labor, tax, benefits, insurance and employment matters. We are a professional employer organization, and by entering into a co-employer relationship with WSEs, we assume certain obligations, responsibilities and potential legal risks of an employer under these laws. However, many of these laws (such as the Employee Retirement Income Security Act, or ERISA, and federal and state employment tax laws) do not specifically address the obligations and responsibilities of a provider of outsourced HR in a co-employer relationship, and the definition of employer under these laws is not uniform. In addition, many states have not addressed the co-employer relationship for purposes of compliance with applicable state laws governing the relationship between employers and employees and state insurance laws. There is even greater uncertainty on the federal level, such as the application of immigration reform to a co-employer relationship, and tax credits for small businesses that utilize a co-employer relationship.

We are not able to predict whether broader federal or state regulation governing the co-employer relationship will be implemented, or if it is, how it will affect us. Any adverse application or interpretation (in courts, agencies or otherwise) of new or existing federal or state laws to the co-employer relationship with our WSEs and clients could harm our business. If federal, state or local jurisdictions were to change their regulatory framework related to outsourced HR, or introduce new laws governing our industry that were materially different from existing laws, those changes could reduce or eliminate the need for some of our services, or could require that we make significant changes in our methods of doing business, which could increase our cost of doing business. Changes in regulations could also affect the extent and type of benefits employers can or must provide employees, the amount and type of taxes employers and employees are required to pay or the time within which employers must remit taxes to the applicable authority. These changes could substantially decrease our revenues and substantially increase our cost of doing business. If we fail to educate and assist our clients regarding new or revised legislation that impacts them, our reputation could be harmed.

Although some states do not explicitly regulate professional employer organizations, 42 states have passed laws that have licensing, certification or registration requirements applicable to professional employer organizations or recognize the professional employer organization model, and other states may implement such requirements in the future. Laws regulating professional employer organizations vary from state to state, but generally provide for oversight of the fiscal responsibility of professional employer organizations, and in some cases codify and clarify the co-employment relationship for processing unemployment claims, workers compensation and other purposes under state law. We may be required to spend significant time and resources to satisfy licensing requirements or other applicable regulations in some states, and we may not be able to satisfy these requirements or regulations in all states, which could prohibit us from doing business in such states. In addition, we cannot assure you that we will be able to renew our licenses in all states.

If we are not recognized as an employer of worksite employees under federal and state regulations, we and our clients could be adversely impacted.

In order for WSEs to receive the full benefit of our benefits offerings, it is important that we act and qualify as an employer of the WSEs under the Internal Revenue Code of 1986, or the Code, and ERISA. In addition, our status as an employer is important for purposes of ERISA preemption of state laws. The definition of employer under various laws is not uniform, and under both the Code and ERISA the term is defined in part by complex multi-factor tests under common law. We believe that we qualify as an employer of our WSEs in the United States under both the Code and ERISA, and we implement processes to protect and preserve this status. However, the U.S. Department of Labor has issued guidance that certain entities in the HR outsourcing industry do not qualify as common law employers of WSEs for ERISA purposes. If we were found not to be an employer under the Code, our WSEs may not receive the favorable tax treatment for any plans intended to qualify under Section 401 of the Code, including our 401(k) plans and cafeteria plans, which could have a material adverse effect on our business. If we were found not to be an employer for ERISA purposes, our plans would not comply with ERISA, and fines and penalties could be imposed. In addition, if we were found not to be an employer for

 

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ERISA purposes, we and our plans would not enjoy the full preemption of state laws provided by ERISA and could be subject to varying state laws and regulations, including laws governing multiple employer welfare arrangements, or MEWAs, as well as to claims based upon state laws.

We and our clients could be adversely impacted by health care reform.

The Patient Protection and Affordable Care Act and the Heath Care and Education Reconciliation Act of 2010, which we refer to collectively as the Act, entail sweeping health care reforms with staggered effective dates from 2010 through 2018, and many provisions of the Act require the issuance of additional guidance from the U.S. Departments of Labor and Health and Human Services, the Internal Revenue Service, and U.S. states. Beginning in 2014, a number of key provisions of the Act take effect, including the establishment of state insurance exchanges, insurance market reforms, “pay or play” penalties on large employers and the imposition of excise taxes on the health insurance industry and reinsurance taxes on insurers and third-party administrators. Collectively, these items have the potential to significantly change the insurance marketplace for employers and how employers provide insurance to employees.

As a co-employer of our clients’ WSEs, we assume or share many of the employer-related responsibilities and legal risks and assist our clients in complying with many employment-related governmental regulations. Generally, the Act and subsequently issued guidance by the Internal Revenue Service and the U.S. Department of Health and Human Services have not addressed, or in some instances are unclear, as to their application in the co-employment relationship. For example, the Act provides for a small business tax credit for eligible companies offering health care coverage to employees. We believe that these tax credits are available to our clients that meet the qualification requirements; however, the Act and subsequently issued Internal Revenue Service guidance do not expressly address the issue of whether small business clients of a professional employer organization may still qualify as small business eligible for such tax credits. As a result of this uncertainty, we are not yet able to determine the impacts to our business, and to our clients, resulting from the Act. In future periods, the changes may result in increased costs to us and our clients and could affect our ability to attract and retain clients. Additionally, we may be limited or delayed in our ability to increase service fees to offset any associated potential increased costs resulting from compliance with the Act. Furthermore, the uncertainty surrounding the terms and application of the Act may delay or inhibit the decisions of potential clients to outsource their HR needs. Any of these developments could harm our business, results of operations and financial condition.

We may have additional tax liabilities, which could harm our business, operating results, financial condition and prospects.

Significant judgments and estimates are required in determining our provision for income taxes and other tax liabilities. Our provision for income taxes, results of operations and cash flows may be impacted if any of our tax positions are challenged and successfully disputed by the tax authorities. In determining the adequacy of our tax provision, we assess the likelihood of adverse outcomes that could result if our tax positions were challenged by the Internal Revenue Service, or IRS, and other tax authorities. The tax authorities in the United States regularly examine our income and other tax returns. For example, in connection with an IRS examination of prior federal income tax returns filed by Gevity, a company we acquired in 2009, we recently received a technical advice memorandum from the IRS taking the position that approximately $10.1 million of tax credits taken by Gevity, and an additional approximately $2.0 million taken by us after acquiring Gevity, should be reversed, which position we dispute. The ultimate outcome of these examinations and tax disputes cannot be predicted with certainty. Should the IRS or other tax authorities assess additional taxes as a result of examinations, we may be required to record charges to operations that could have a material impact on our results of operations, financial position or cash flows.

Our business and operations have experienced rapid growth in recent periods, and if we are unable to effectively manage this growth, our business and results of operations may suffer.

We have experienced rapid growth and have significantly expanded our operations in recent periods, which has placed a strain on our management, administrative, operational and financial infrastructure. Managing this growth requires us to further refine our operational, financial and management controls and reporting systems and procedures.

 

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Our ability to effectively manage any significant growth of our business will depend on a number of factors, including our ability to do the following:

 

   

effectively recruit, integrate, train and motivate a large number of new employees, including our direct sales force, while retaining our existing employees, maintaining the beneficial aspects of our corporate culture and effectively executing our business plan;

 

   

satisfy our existing clients and identify and acquire new clients;

 

   

enhance the breadth and quality of our services;

 

   

continue to improve our operational, financial and management controls; and

 

   

make sound business decisions in light of the scrutiny associated with operating as a public company.

These activities will require significant operating and capital expenditures and allocation of valuable management and employee resources, and we expect that our growth will continue to place significant demands on our management and on our operational and financial infrastructure.

Our future financial performance and our ability to execute on our business plan will depend, in part, on our ability to effectively manage any future growth. We cannot assure you that we will be able to do so in an efficient or timely manner, or at all. In particular, any failure to successfully implement systems enhancements and improvements will likely negatively impact our ability to manage our expected growth, ensure uninterrupted operation of key business systems and comply with the rules and regulations that are applicable to public companies. If we fail to manage our growth effectively, our costs and expenses may increase more than we expect them to, which in turn could harm our business, results of operations and financial condition.

We may not be able to sustain our revenue growth rate or profitability in the future.

While we have achieved profitability on an annual basis in each of the last two and four of the last five fiscal years, we expect our operating expenses to increase substantially in the near term, particularly as we make significant investments in our sales and marketing organization, expand our operations and infrastructure and enhance the breadth and quality of our services. If our revenues do not increase to offset these increases in our operating expenses, we may not be profitable in future periods.

Moreover, you should not consider our historical revenue growth to be indicative of our future performance. As we grow our business, our revenue growth rates may slow in future periods due to a number of reasons, which may include slowing demand for our services, increasing competition, a decrease in the growth of our overall market, our failure, for any reason, to continue to capitalize on growth opportunities, the maturation of our business or the decline in the number of SMBs in our target markets.

Our industry is highly competitive, which may limit our ability to maintain or increase our market share or improve our results of operations.

We face significant competition on a national and regional level from a number of companies purporting to deliver a range of bundled services that are generally similar to the services we provide, including large professional employer organizations such as the TotalSource unit of Automatic Data Processing, Inc. and Insperity, Inc., as well as specialized and small professional employer organization service providers. If and to the extent that we and other companies providing these services are successful in growing our businesses, we anticipate that future competitors will enter this industry. Some of our current, and any future, competitors have or may have greater marketing and financial resources than we do, and may be better positioned than we are in certain markets. Increased competition in our industry could result in price reductions or loss of market share, any of which could harm our business. We expect that we will continue to experience competitive pricing pressure. If we cannot compete effectively, our market share, business, results of operations and financial condition may suffer.

 

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In addition to competition from other professional employer organizations, we also face competition in the form of companies and third parties serving HR needs in traditional manners. These forms of competition include:

 

   

HR and information systems departments and personnel of companies that perform their own administration of benefits, payroll and other HR functions;

 

   

providers of certain endpoint HR services, including payroll, benefits and business process outsourcers with high-volume transaction and administrative capabilities, such as Automatic Data Processing, Inc., Paychex, Inc. and other third-party administrators; and

 

   

benefits exchanges that provide benefits administration services over the Internet to companies that otherwise maintain their own benefit plans.

We believe that our services are attractive to many SMBs in part because of our ability to provide workers compensation, health care and other benefits programs to them on a cost-effective basis. We compete with insurance brokers and other providers of this coverage in this regard, and our offerings must be priced competitively with those provided by these competitors in order for us to attract and retain our clients.

We may not be successful in convincing potential clients that the use of our services is a superior, cost- effective means of satisfying their HR obligations relative to the way in which they currently satisfy these obligations.

If we cannot compete effectively against other professional employer organizations or against the alternative means by which companies meet their HR obligations, our market share, business, results of operations and financial condition may suffer.

Adverse changes in our relationships with key vendors could impair the quality of our solution.

Our success depends in part on our ability to establish and maintain arrangements and relationships with vendors that supply us with essential components of our services. These service providers include insurance carriers to provide health and workers compensation insurance coverage for WSEs, as well as other vendors such as couriers used to deliver client payroll checks and banks used to electronically transfer funds from clients to their employees. Failure by these service providers, for any reason, to deliver their services in a timely manner could result in material interruptions to our operations, impact client relations, and result in significant penalties or other liabilities to us. Our agreements with these service providers typically have a term of one year. In addition, many of our employee benefit plan agreements may be terminated by the insurance companies on 90 days’ notice. If any of these vendors decided to terminate its relationship with us, we may have difficulty obtaining replacement services at reasonable rates or on a timely basis, if at all. The loss of any one or more of our key vendors, or our inability to partner with certain vendors that are better-known or more desirable to our clients or potential clients, could impair the quality of our solution and harm our business.

We depend on licenses to third-party software in order to provide our services.

We license a substantial portion of the software on which we depend to provide services to our clients from third-party vendors, including Oracle America, Inc. If we are unable to maintain these licenses, or if we are required to make significant changes in the terms and conditions of these licenses, we may need to seek replacement vendors or change our software architecture to address licensing revisions with our current vendors, either of which could increase our expenses and impair the quality of our services. In addition, we cannot assure you that our key vendors will continue to support their technology. Financial or other difficulties experienced by these vendors may adversely affect the technologies we incorporate into our products and services. If this software ceases to be available, we may be unable to find suitable alternatives on reasonable terms, or at all.

If we are deemed to be an insurance agent or third-party administrator, we may incur significant additional costs and expenses, which could harm our results of operations.

State regulatory authorities generally require licenses for companies that do business in their states as insurance agents or third-party administrators, such as those that handle health or retirement plan funding and

 

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claim processing. Insurance and third-party administrator regulation covers a host of activities, including sales, underwriting, rating, claims payments and record keeping by companies and agents. We do not believe that our services constitute acting as an insurance agent or third-party administrator. If regulatory authorities in any state determine that the nature of our business requires that we be licensed as an insurance agent or as a third-party administrator, we may need to hire additional personnel to manage regulatory compliance and become obligated to pay annual regulatory fees, which could adversely affect our results of operations.

Most of our clients are concentrated in a relatively small number of industries, making us vulnerable to downturns in those industries.

Most of our clients operate in the technology, life sciences, property management, professional services, banking and financial services, retail, manufacturing and hospitality services industries. As a result, if any of those industries suffers a downturn, the portion of our business attributable to clients in that industry could be adversely affected. For example, in July 2013, we acquired Ambrose Employer Group, LLC, a New York-based company that provides HR services primarily to WSEs in the financial services industry in the New York area, which we refer to as Ambrose. If the financial services industry were to suffer a downturn similar to the one that began in the fall of 2008, our Ambrose product line would likely suffer.

We have a substantial amount of indebtedness, which could adversely affect our financial condition and our operating flexibility.

As of September 30, 2013, we had $820.0 million in outstanding indebtedness under our credit facility, all of which was secured indebtedness of our subsidiary, TriNet HR Corporation, guaranteed on a senior secured basis by us and certain of our subsidiaries. In August 2013, we entered into two new credit facilities, the proceeds of which we used to repay approximately $448.3 million of indebtedness outstanding under the previous credit facility, declare a special dividend, issue letters of credit and pay transaction costs. Our level of indebtedness and the limitations imposed on us by our credit facilities could affect our business in various ways, including the following:

 

   

we will have to use a portion of our cash flows from operating activities for debt service rather than for other operational activities;

 

   

we may not be able to borrow additional funds or obtain additional financing for future working capital, acquisitions, capital expenditures or other corporate purposes, or may have to pay more for such financing;

 

   

some or all of the indebtedness under our current or future credit facilities bears interest at variable interest rates, making us more vulnerable to interest rate increases;

 

   

we could be less able to take advantage of significant business opportunities, such as acquisition opportunities, and to react to changes in market or industry conditions; and

 

   

we may be more vulnerable to general adverse economic and industry conditions as a result of our inability to reduce our debt service costs in response to reduced revenues.

Because borrowings under each of our credit facilities bear interest at variable rates, our interest expense could increase even though the amount borrowed remains the same, exacerbating these risks. Our ability to meet these expenses depends on our future business performance, which will be affected by various factors, including the risks described in this “Risk Factors” section. We are not able to control many of these factors, such as economic conditions in the markets where we operate and pressure from competitors. Our operations may provide insufficient cash to pay the principal and interest on our credit facility and to meet our other debt obligations. If so, we may be required to refinance all or part of our existing indebtedness or borrow additional funds, which we may not be able to do on terms that are acceptable to us, if at all. In addition, the terms of our existing or future debt agreements may restrict our ability to take some or all of these responsive actions. If we were unable to pay the principal and interest on our credit facility or meet our other debt obligations, the lenders under our credit facility could terminate their commitments to extend further credit to us and accelerate a substantial part of our indebtedness. If that were to happen, we may not be able to repay all of the amounts that would become due under our indebtedness or refinance our debt. If we were unable to repay those amounts or refinance our debt, the lenders under each of our credit

 

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facilities could proceed against the collateral granted to them to secure that indebtedness. If that were to happen, our results of operations and financial condition could be harmed and we might be forced to seek bankruptcy protection.

The terms of our credit facilities may restrict our current and future operations, which would impair our ability to respond to changes in our business and to manage our business.

Our credit facilities contain, and any future indebtedness of ours would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on us, including restricting our ability to:

 

   

incur, assume or guarantee additional debt;

 

   

pay dividends or distributions or redeem or repurchase capital stock;

 

   

incur or assume liens;

 

   

make loans, investments and acquisitions;

 

   

engage in sales of assets and subsidiary stock;

 

   

enter into sale-leaseback transactions;

 

   

enter into certain transactions with affiliates;

 

   

complete dividends, loans or asset transfers from our subsidiaries;

 

   

enter into new lines of business;

 

   

prepay other indebtedness;

 

   

transfer all or substantially all of our assets or enter into merger or consolidation transactions with another person; and

 

   

make capital expenditures.

Under the revolving credit facility, we are required to comply with a financial covenant that requires us and our subsidiaries to maintain a maximum leverage ratio so long as there is any indebtedness outstanding under the revolving credit facility (excluding letters of credit issued and outstanding of up to $15.0 million other than letters of credit that have been cash collateralized). Our ability to meet the leverage ratio can be affected by events beyond our control, and we may be unable to comply with it. Our failure to comply with this financial covenant or other restrictive covenants under our credit facilities and other debt instruments could result in a default under each of our credit facilities and/or other debt instruments, which in turn could result in the termination of the lenders’ commitments to extend further credit to us under our revolving credit facility and acceleration of a substantial portion of our indebtedness then outstanding under each of our credit facilities. If that were to happen, we may not be able to repay all of the amounts that would become due under our indebtedness or refinance our debt. If we were unable to repay those amounts or refinance our debt, the lenders under either of our credit facilities could proceed against the collateral granted to them to secure that indebtedness. If that were to happen, our results of operations and financial condition could be harmed and we might be forced to seek bankruptcy protection.

Volatility in the financial and economic environment could harm our business.

Demand for our services is sensitive to changes in the level of overall economic activity in the markets in which we operate. During periods of weak economic conditions, employment levels tend to decrease, small business failures tend to increase and interest rates may become more volatile. Current or potential clients may also react to weak economic conditions or forecasted weak economic conditions by reducing their employee headcount or by lowering their wage, bonus or benefits levels, any of which would affect our revenues, and may affect our margins, because we may be unable to reduce our selling, administrative or other expenses sufficient to offset the drop in revenues. It is difficult for us to forecast future demand for our services due to the inherent difficulty in

 

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forecasting the direction and strength of economic cycles. These conditions may affect the willingness of our clients and potential clients to pay outside vendors for services like ours, and may impact their ability to pay their obligations to us on time, or at all. In addition, if businesses have difficulty obtaining credit, business growth and new business formation may be impaired, which could also harm our business. Even modest downturns in economic activity or the availability of credit on a regional or national level could harm our business.

If we fail to retain our key personnel or fail to attract additional skilled personnel, our business may suffer.

Our operations are dependent on the continued efforts of our officers and executive management and the performance and productivity of our regional managers and field personnel. Our ability to attract and retain business depends on the quality of our services and the relationships that we maintain with our clients. If we lose key personnel with significant experience in managing our business, this could impair our ability to deliver services effectively or profitably, could divert other senior management time in seeking replacements, and could adversely affect our reputation with our clients and potential clients. Some of our most important client relationships depend on the continued involvement of individual managers or sales personnel, and any loss of those individuals could jeopardize those relationships and in turn adversely affect our operating results.

Our future success will depend on our ability to attract, hire, train and retain highly skilled technical, sales and marketing and support personnel, particularly with expertise in outsourced solutions and the technology platforms that we deploy today and will deploy in the future. Qualified personnel are in great demand throughout the HR industry. Our failure to attract and retain the appropriate personnel may limit the rate at which we can expand our business, including developing new services and attracting new clients.

Improper disclosure of sensitive or confidential company, employee or client data, including personal data, could result in liability and harm our reputation.

Our business involves the use, storage and transmission of information about our corporate employees, WSEs and clients. This information includes sensitive or confidential data, such as employees’ Social Security numbers, bank account numbers, retirement account information and medical information. We and our third-party service providers have established policies and procedures to help protect the security and privacy of this information, but it is possible that our security controls over sensitive or confidential data may not prevent the improper access to or disclosure of this information. Third parties, including vendors that provide services for our operations, could also be a source of security risk to us in the event of a failure of their own security systems and infrastructure. Any such disclosure could harm our reputation and expose us to liability under our contracts and under the many and sometimes contradictory laws and regulations regarding data privacy in the various markets in which we operate. Any failure to adhere to applicable laws and regulations or to our contractual commitments with respect to the preservation and use of confidential information could result in legal liability and could damage our reputation.

Any failure in our business systems could reduce the quality of our business services, which could harm our reputation and expose us to liability.

Our business systems rely on the complex integration of numerous hardware and software subsystems to manage the transactions involved in managing the client relationship through the processing of employee, payroll and benefits data. These systems can be disrupted by, among other things, equipment failures, computer server or systems failures, network outages, malicious acts, software errors or defects, vendor performance problems and power failures. Any delay or failure in our systems that impairs our ability to communicate electronically with our clients, employees or vendors or our ability to store or process data could harm our reputation and our business. If we are unable to meet client demands or service expectations, we may lose existing clients and we may have difficulty attracting new clients. In addition, errors in our products and services, such as the erroneous denial of healthcare benefits or delays in making payroll, could expose our clients to liability claims from improperly serviced WSEs, for which we are contractually obligated to provide indemnification.

 

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We have disaster recovery, business continuity, and crisis management plans and procedures designed to protect our business against a multitude of events, including natural disasters, military or terrorist actions, power or communication failures, or similar events. Despite our preparations, our plans may not be successful in preventing the loss of client data, service interruptions, and disruptions to our operations, or damage to our important facilities. The precautions that we have taken to protect ourselves against these types of events may prove to be inadequate. If we suffer damage to our data or operations centers, experience a telecommunications failure or experience a security breach, our operations could be interrupted. Any interruption or other loss may not be covered by our insurance and could harm our reputation.

If our systems were to fail for any of these reasons during payroll processing, preventing the proper payment of employees, or the proper remission of payroll taxes, we could be liable for wage payment delay penalties and payroll tax penalties, as well as other contractual penalties. Any inaccuracies in the processing of health insurance benefits could result in our being liable for lapses in insurance. If any of our systems fails to operate properly or becomes disabled even for a brief period of time, we could suffer financial loss, a disruption of our businesses, liability to clients, regulatory intervention, or damage to our reputation.

We must keep pace with rapid technological change in order to succeed.

Our business depends upon the use of software, hardware and networking technologies that must be frequently and rapidly upgraded in response to technological advances, competitive pressures and consumer expectations. To succeed, we will need to effectively develop or license and integrate these new technologies as they become available to improve our services commensurate with client requirements. In particular, we rely on enterprise software applications licensed from third parties that are upgraded from time to time, such as PeopleSoft HR information systems and Oracle databases, that provide the basis for our HR information system platform supporting payroll, benefits and other HR functions. Any difficulties we encounter in adapting applications upgrades to our systems could harm our performance or delay or prevent the successful development, introduction or marketing of new services. New products or upgrades may not be released according to schedule, or may contain defects when released. Difficulties in integrating new technologies could result in adverse publicity, loss of sales, delay in market acceptance of our services, or client claims against us, any of which could harm our business. We could also incur substantial costs in modifying our services or infrastructure to adapt to these changes. In addition, we could lose market share if our competitors develop technologically superior products and services.

Our co-employment relationship with our worksite employees exposes us to business risks.

We are a co-employer of our WSEs, and there is a possibility that we may be subject to liability for violations of employment laws by our clients and acts or omissions of our WSEs, who may be deemed to be our agents, even if we do not participate in any such acts or violations. Such laws include, but are not limited to, laws relating to payment of wages, employment discrimination, labor relations and whistleblower protection. Although our client agreements establish the contractual division of responsibilities between us and our clients for various personnel management matters, including compliance with and liability under various governmental regulations, as well as providing for clients to indemnify us for any liability attributable to clients’ or their employees’ conduct, we may not be able to effectively enforce or collect these contractual obligations with our clients, which could harm our business. We maintain employment practices liability insurance coverage (including coverages for our clients) to manage our and our clients’ exposure for various employee-related claims, and as a result, our incurred costs with respect to this exposure have historically been insignificant to our operating results. Employment practices liability insurance generally excludes coverage for claims relating to compliance with laws associated with the classification of employees as exempt or non-exempt, such as overtime pay and minimum wage law compliance. We cannot assure you that our insurance will be sufficient in amount or scope to cover all claims that may be asserted against us and for which we are unable to obtain indemnification from our clients. If judgments or settlements related to WSEs that we and our clients employ exceed our insurance coverage, it could harm our results of operations and financial condition. We cannot assure you that we will be able to obtain appropriate types and levels of insurance in the future, that we will be able to replace existing policies on acceptable terms, or at all, or that our insurers will be able to pay all claims that we may make under our policies, any of which could harm our business.

 

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Our failure to maintain or enhance our reputation or brand recognition could harm our business.

We believe that maintaining and enhancing our reputation and the TriNet brand identity is critical to maintaining our relationships with our clients and vendors and our ability to attract new clients and vendors. We also believe that our reputation and brand identity will become more important as competition in our industry continues to develop. Our ability to maintain and enhance our reputation and brand identity will be affected by a number of factors, some of which are beyond our control, including:

 

   

the effectiveness of our marketing efforts;

 

   

our ability to attract and retain new sales personnel to expand our direct sales force;

 

   

our ability to retain our existing clients and attract new clients;

 

   

the quality and perceived value of our services;

 

   

our ability to successfully differentiate our services from those of our competitors;

 

   

actions of our competitors and other third parties;

 

   

positive or negative publicity about us or our industry in general;

 

   

interruptions, delays or attacks on our website; and

 

   

litigation or regulatory developments.

Any brand promotion activities in which we engage may not be successful or yield increased revenues. Furthermore, negative publicity, whether or not justified, relating to events or activities attributed to us, our corporate employees, our WSEs, our vendors, other companies in our industry or others associated with any of these parties, may tarnish our reputation and reduce the value of our brand. Damage to our reputation and loss of brand equity may reduce demand for our services and harm our business, results of operations and financial condition. Moreover, any attempts to rebuild our reputation and restore the value of our brand may be costly and time-consuming, and any such efforts may not ultimately be successful.

If we are unable to protect our intellectual property, or if we infringe on the intellectual property rights of others, our business may be harmed.

Our success depends in part on intellectual property rights to the services that we develop. We rely on a combination of contractual rights, including non-disclosure agreements, trade secrets, copyrights and trademarks, to establish and protect our intellectual property rights in our names, services, methodologies and related technologies. If we lose intellectual property protection or the ability to secure intellectual property protection on any of our names, confidential information or technology, this could harm our business. Our intellectual property rights may not prevent competitors from independently developing services and methodologies similar to ours, and the steps we take might be inadequate to deter infringement or misappropriation of our intellectual property by competitors, former employees or other third parties, any of which could harm our business. We do not currently have any registered patents or pending patent applications covering any of our technology. We own registered trademarks in the United States and Canada that have various expiration dates unless renewed through customary processes. Our trademark registrations may be unenforceable or ineffective in protecting our trademarks. Our trademarks may be unenforceable in countries outside of the United States, which may adversely affect our ability to build our brand outside of the United States.

Although we believe that our conduct of our business does not infringe on the intellectual property rights of others, third parties may nevertheless assert infringement claims against us in the future. We may be required to modify our products, services, internal systems or technologies, or obtain a license to permit our continued use of those rights. We may be unable to do so in a timely manner, or upon reasonable terms and conditions, which could harm our business. In addition, future litigation over these matters could result in substantial costs and resource diversion. Adverse determinations in any litigation or proceedings of this type could subject us to significant liabilities to third parties and could prevent us from using some of our services, internal systems or technologies.

 

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Our use of open source software could subject us to possible litigation.

A portion of our technologies incorporates open source software, and we expect to continue to incorporate open source software into our platform in the future. Few of the licenses applicable to open source software have been interpreted by courts, and their application to the open source software integrated into our proprietary technology platform may be uncertain. If we fail to comply with these licenses, then pursuant to the terms of these licenses, we may be subject to certain requirements, including requirements that we make available the source code for our software that incorporates the open source software. We cannot assure you that we have not incorporated open source software in our software in a manner that is inconsistent with the terms of the applicable licenses or our current policies and procedures. If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could incur significant legal expenses defending against such allegations. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition or require us to devote additional research and development resources to change our technology platform.

If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.

As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control over financial reporting and, beginning with our annual report for the year ending December 31, 2015, provide a management report on our internal control over financial reporting. This report must be attested to by our independent registered public accounting firm. If we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated.

We are in the process of designing and implementing our internal control over financial reporting, which process will be time consuming, costly and complicated. If we identify material weaknesses in our internal control over financial reporting in the future, we are unable to comply with the requirements of Section 404 in a timely manner, we are unable to assert that our internal control over financial reporting is effective or our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting when required to do so, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the Securities and Exchange Commission, or SEC, or other regulatory authorities, which could require additional financial and management resources.

If we are unable to successfully remediate the existing material weakness in our internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected.

In preparing and reviewing our consolidated financial statements as of and for the nine months ended September 30, 2013, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. The material weakness identified related to our incorrectly recording a deferred tax asset in connection with our accounting for our acquisition of Ambrose that should have been reported as goodwill. As a result, there were adjustments required in connection with closing our books and records and preparing our consolidated financial statements for the nine months ended September 30, 2013.

In response to this material weakness, we plan to hire additional personnel to build our financial management and reporting infrastructure, and further develop and document our accounting policies and financial reporting procedures. However, we cannot assure you that we will be successful in pursuing these

 

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measures or that these measures will significantly improve or remediate the material weakness described above. We also cannot assure you that we have identified all of our existing material weaknesses, or that we will not in the future have additional material weaknesses.

Neither we nor our independent registered public accounting firm has performed an evaluation of our internal control over financial reporting during any period in accordance with the provisions of the Sarbanes-Oxley Act. In light of the material weakness that was identified as a result of the limited procedures performed, we believe that it is possible that, had we and our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional material weaknesses or significant control deficiencies may have been identified.

If we fail to remediate the material weakness or to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to accurately report our financial results, or report them within the timeframes required by law or stock exchange regulations. Failure to comply with Section 404 of the Sarbanes-Oxley Act could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. We cannot assure you that we will be able to remediate the material weakness in a timely manner, or at all, or that in the future, additional material weaknesses will not exist or otherwise be discovered. If our efforts to remediate the material weakness identified are not successful, or if other material weaknesses or other significant control deficiencies occur, our ability to accurately and timely report our financial results could be impaired, which could result in late filings of our annual and quarterly reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, restatements of our consolidated financial statements, a decline in our stock price, suspension or delisting of our common stock from the                     , and could adversely affect our reputation, results of operations and financial condition.

We will incur substantial increased costs as a result of being a public company.

As a public company, we will incur significant levels of legal, accounting and other expenses that we did not incur as a private company. We will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of                      and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and results of operations. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and results of operations. Although we have already hired additional corporate employees to comply with these requirements, we may need to hire more corporate employees in the future or engage outside consultants, which would increase our costs and expenses.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

 

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We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

As a result of disclosure of information in this prospectus and in the filings that we will be required to make as a public company, our business, results of operations and financial condition will become more visible, which may result in threatened or actual litigation, including by competitors and other third parties. If any such claims are successful, our business, results of operations and financial condition could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business, results of operations and financial condition.

Risks Related to This Offering and Ownership of Our Common Stock

There has been no prior market for our common stock. An active market for our common stock may not develop or be sustainable and investors may not be able to resell their shares at or above the initial public offering price.

There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations between the representatives of the underwriters and us and may vary from the market price of our common stock following this offering. If you purchase shares of our common stock in this offering, you may not be able to resell those shares at or above the initial public offering price. An active or liquid market in our common stock may not develop upon completion of this offering or, if it does develop, it may not be sustainable.

Our stock price may be volatile or may decline regardless of our operating performance, resulting in substantial losses for investors purchasing shares in this offering.

The initial public offering price for the shares of our common stock sold in this offering will be determined by negotiation between the representatives of the underwriters and us. This price may not reflect the market price of our common stock following this offering. In addition, we expect the market price of our common stock may be volatile for the foreseeable future. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including the factors listed below and other factors described in this “Risk Factors” section:

 

   

actual or anticipated fluctuations in our results of operations;

 

   

any financial projections we provide to the public, any changes in these projections or our failure to meet these projections;

 

   

failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

   

ratings changes by any securities analysts who follow our company;

 

   

announcements by us or our competitors of significant innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;

 

   

changes in operating performance and stock market valuations of other business services companies generally, or those in our industry in particular;

 

   

price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;

 

   

changes in our board of directors or management;

 

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sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;

 

   

lawsuits threatened or filed against us;

 

   

short sales, hedging and other derivative transactions involving our capital stock;

 

   

general economic conditions in the United States and abroad; and

 

   

other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

In addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many business services companies. Stock prices of many business services companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business, results of operations and financial condition.

Substantial future sales of shares of our common stock could cause the market price of our common stock to decline.

Sales of a substantial number of shares of our common stock in the public market after this offering, or the perception that these sales might occur, could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities. We cannot predict the effect that such sales may have on the prevailing market price of our common stock.

All of our executive officers, senior management and directors and substantially all of the holders of our capital stock are subject to lock-up agreements that restrict their ability to transfer shares of our capital stock for 180 days from the date of this prospectus. Approximately              shares of our common stock will become eligible for sale upon expiration of the 180-day lock-up period. J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC may, in their sole discretion, permit the parties to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

In addition, as of September 30, 2013, there were 3,343,372 shares of common stock subject to outstanding options and 3,266 shares of common stock issuable upon settlement of restricted stock units. We intend to register all of the shares of common stock issuable upon exercise of these outstanding options and settlement of these outstanding restricted stock units, and upon exercise or settlement of any options or other equity incentives we may grant in the future, for public resale under the Securities Act of 1933, as amended. Accordingly, these shares will be able to be freely sold in the public market upon issuance as permitted by any applicable vesting requirements, subject to the lock-up agreements described above. These shares will become eligible for sale in the public market to the extent such options are exercised or such restricted stock units settle, subject to the lock-up agreements described above and compliance with applicable securities laws.

Holders of 19,032,854 shares of common stock issuable upon conversion of outstanding preferred stock as of September 30, 2013, and without giving effect to the sale of shares in this offering by the selling stockholders, have rights, subject to some conditions, to require us to file registration statements for the public resale of the common stock issuable upon conversion of such shares or to include such shares in registration statements that we may file for TriNet or our stockholders.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

The initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of our common stock outstanding immediately following this offering. Therefore, if you purchase shares of our common stock in this offering at a price of $         , which is the midpoint of the

 

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estimated offering price range set forth on the cover page of this prospectus, you will experience immediate dilution of $          per share, the difference between the price per share you pay for our common stock and its pro forma net tangible book value per share as of September 30, 2013, after giving effect to the issuance of shares of our common stock in this offering. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our common stock. In addition, we have issued options and a warrant to acquire our common stock at prices significantly below the initial public offering price. To the extent that outstanding options and the warrant are ultimately exercised, there will be further dilution to investors purchasing our common stock in this offering. In addition, if the underwriters exercise their option to purchase additional shares from us or if we issue additional equity securities, you will experience additional dilution.

Future sales and issuances of our capital stock or rights to purchase our capital stock could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to decline.

We may issue additional securities after this offering. Future sales and issuances of our capital stock or rights to purchase our capital stock could result in substantial dilution to our existing stockholders. We may sell common stock, convertible securities and other equity securities in one or more transactions at prices and in a manner as we may determine from time to time. If we sell any such securities in subsequent transactions, investors may be materially diluted. New investors in these subsequent transactions could gain rights, preferences and privileges senior to those of holders of our common stock.

The existing ownership of capital stock by our executive officers, directors and their affiliates has the effect of concentrating voting control with our executive officers, directors and their affiliates for the foreseeable future, which will limit your ability to influence corporate matters.

Upon the closing of this offering, persons and entities affiliated with General Atlantic will beneficially own approximately     % of our outstanding common stock, and all of our directors, officers and their affiliates will beneficially own, in the aggregate, approximately     % of our outstanding common stock, in each case, assuming no exercise of the underwriters’ option to purchase additional shares. As a result, these stockholders will be able to determine substantially all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit the ability of other stockholders to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.

If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business, our market and our competitors. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

We may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a return.

We expect to use the net proceeds that we receive from this offering for repayment of indebtedness, general corporate purposes, including working capital, sales and marketing activities, general and administrative matters and capital expenditures. We may also use a portion of the net proceeds to acquire complementary businesses, products, services or technologies. Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not increase the value of our business, which could cause the price of our stock to decline.

 

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Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.

Provisions in our certificate of incorporation and bylaws, as they will be amended and restated in connection with this offering, may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and bylaws will include provisions that:

 

   

establish a classified board of directors so that not all members of our board of directors are elected at one time;

 

   

permit our board of directors to establish the number of directors;

 

   

provide that directors may only be removed “for cause”;

 

   

require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;

 

   

authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;

 

   

eliminate the ability of our stockholders to call special meetings of stockholders;

 

   

prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

 

   

provide that our board of directors is expressly authorized to make, alter or repeal our bylaws; and

 

   

establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for our stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any holder of at least 15% of our capital stock for a period of three years following the date on which the stockholder became a 15% stockholder.

In making your investment decision, you should not rely on information in public media that is published by third parties. You should rely only on statements made in this prospectus in determining whether to purchase our common stock.

You should carefully evaluate all of the information in this prospectus. We have in the past received, and may continue to receive, media coverage, including coverage that is not directly attributable to statements made by our directors, officers and other employees. We cannot confirm the accuracy of such coverage. You should rely only on the information contained in this prospectus in determining whether to purchase our shares of common stock.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections titled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. In some cases you can identify these statements by forward-looking words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” or the negative or plural of these words or similar expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

 

   

the market acceptance of outsourcing the HR function, and the anticipated benefits associated with the use of a bundled HR solution;

 

   

our ability to expand our direct sales force and the efficacy of our sales and marketing efforts;

 

   

our ability to gain new clients, and our clients’ ability to grow and gain more employees;

 

   

our ability to effectively acquire and integrate new businesses;

 

   

the effects of seasonal trends on our results of operations;

 

   

changes to and our ability to comply with laws and regulations, including both those applicable to the co-employment relationship as well as those applicable to our clients’ businesses and their employees;

 

   

the implementation of the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Reconciliation Act, and its application to the co-employer relationship, and

 

   

our ability to effectively manage our growth;

 

   

the effects of increased competition and our ability to compete effectively;

 

   

our ability to comply with the restrictions of our credit facilities and meet our debt obligations;

 

   

economic and financial conditions and our ability to succeed in different economic environments;

 

   

employment and wage levels;

 

   

industry and technology trends;

 

   

our ability to attract and retain qualified personnel;

 

   

our ability to maintain, protect and enhance our brand and our intellectual property;

 

   

our financial performance, including our revenues, costs of revenues, gross margin and operating expenses, and our ability to sustain profitability;

 

   

our future capital requirements and estimates regarding the sufficiency of our cash resources; and

 

   

our ability to effectively scale and adapt our technology.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. We cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other

 

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person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.

You should read this prospectus and the documents that we reference in this prospectus and have filed with the Securities and Exchange Commission as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

 

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MARKET, INDUSTRY AND OTHER DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our market position, market opportunity and market size, is based on information from various sources, on assumptions that we have made based on such data and other similar sources and on our knowledge of the markets for our products. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates.

We have not independently verified any third-party information. While we believe that the market position, market opportunity and market size information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

The following reports described herein represent data, research opinion or viewpoints published as part of a syndicated subscription service by each of the respective publishers thereof and are not representations of fact. Such reports speak as of their respective original publication dates (and not as of the date of this prospectus) and the opinions expressed in such reports are subject to change without notice:

 

  1. Statistics about Business Size (including Small Business), reported by the U.S. Census Bureau at www.census.gov/econ/smallbus.html

 

  2. HR Department Benchmarks and Analysis 2013-2014, published by the Bureau of National Affairs, Inc.

 

  3. 2012 Annual Report of the National Association of Professional Employer Organizations

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from the sale of common stock offered by us of approximately $         million, based upon an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares of common stock is exercised in full, we estimate that we will receive net proceeds of approximately $         million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of common stock by the selling stockholders.

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the net proceeds to us from this offering by approximately $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares of common stock offered by us would increase (decrease) the net proceeds to us from this offering by approximately $         million, assuming that the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions.

The principal purpose of this offering is to repay approximately $200 million of indebtedness outstanding under our credit facilities, increase our equity capitalization and financial flexibility, increase our visibility in the marketplace and create a public market for our common stock.

Our credit facilities consist of (a) a first lien credit facility, which provides for a $75.0 million revolving credit facility, a $175.0 million tranche B-1 term loan and a $455.0 million tranche B-2 term loan, and (b) a second lien credit facility, which provides for a $190.0 million term loan. As of September 30, 2013, we had an aggregate of $820.0 million of indebtedness outstanding under our senior secured credit facilities. We intend to repay the entire $190.0 million of indebtedness outstanding under our second lien term loan and a portion of the indebtedness outstanding under our $175.0 million tranche B-1 term loan with the net proceeds of this offering. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facilities.”

As of the date of this prospectus, we cannot specify with certainty all of the particular uses for any remaining net proceeds to us from this offering. However, we currently intend to use the net proceeds to us from this offering primarily for general corporate purposes, including working capital, sales and marketing activities, general and administrative matters and capital expenditures. We may also use a portion of the net proceeds from this offering for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any such acquisitions or investments. We will have broad discretion over the uses of the net proceeds from this offering. Pending these uses, we intend to invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities such as money market funds, certificates of deposit, commercial paper and guaranteed obligations of the U.S. government.

 

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DIVIDEND POLICY

Our board of directors has declared three special dividends since January 1, 2011. In May 2011, our board of directors declared a special dividend of $2.20 per common-equivalent share for holders of record of our preferred stock and $2.20 per share for holders of record of our common stock and restricted stock units. The dividends for holders of preferred stock and common stock were fully paid in June and July 2011, respectively, for a total of $50.9 million. The dividends for holders of restricted stock units, up to a total of $0.2 million, are payable as the restricted stock units vest. In March 2012, our board of directors declared a special dividend of $3.13 per common-equivalent share for holders of record of our preferred stock and $3.13 per share for holders of record of our common stock and restricted stock units. The dividends for holders of preferred stock and common stock were fully paid in March and May 2012, respectively, for a total of $75.4 million. The dividends for holders of restricted stock units, up to a total of $0.1 million, are payable as the restricted stock units vest. In August 2013, our board of directors declared a special dividend of $23.50 per common-equivalent share for holders of record of our preferred stock and $11.75 per share for holders of record of our common stock and restricted stock units. The dividends for holders of preferred stock and common stock were fully paid in August and September 2013, respectively, for a total amount of $310.7 million. The dividends for holders of restricted stock units, up to a total of $0.1 million, are payable as the restricted stock units vest.

Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. In addition, our credit facilities contain restrictions on our ability to declare and pay cash dividends on our capital stock.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents, notes payable and capitalization as of September 30, 2013:

 

   

on an actual basis;

 

   

on a pro forma basis, giving effect to the conversion of all outstanding shares of preferred stock into 19,032,854 shares of common stock immediately prior to the closing of this offering and the filing and effectiveness of our amended and restated certificate of incorporation in Delaware; and

 

   

on a pro forma as adjusted basis to reflect, in addition to the pro forma adjustments set forth above, (i) the sale by us of         shares of common stock in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and (ii) the application of $200.0 million of the net proceeds of this offering to repay amounts outstanding under our credit facilities.

You should read the information in this table together with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of September 30, 2013  
     Actual     Pro
Forma
    Pro Forma  As
Adjusted(1)
 
     (in thousands, except share and per share data)  

Cash and cash equivalents

   $ 112,161      $ 112,161     
  

 

 

   

 

 

   

 

 

 

Notes payable, current and non-current

   $ 820,000      $ 820,000     
  

 

 

   

 

 

   

 

 

 

Convertible preferred stock:

      

Series G convertible preferred stock, $0.0001 per share stated value, 5,391,441 shares authorized, issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     59,059                 

Series H convertible preferred stock, $0.0001 per share stated value, 4,124,986 shares authorized, issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     63,819                 

Stockholders’ equity:

      

Common stock, $0.00005 per share stated value, 32,000,000 shares authorized and 7,417,056 shares issued and outstanding, actual;         shares authorized and 26,449,910 shares issued and outstanding, pro forma;         shares authorized and         shares issued and outstanding, pro forma as adjusted

     71,017        193,895     

Accumulated deficit

     (426,303     (426,303  

Accumulated other comprehensive loss

     (158     (158  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

   $ (355,444   $ (232,566  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 699,595      $ 699,595     
  

 

 

   

 

 

   

 

 

 

 

(1) Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares of our common stock offered by us would increase (decrease) cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $         million, assuming the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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The outstanding share information in the table above is based on 26,449,910 shares of our common stock (including preferred stock on an as-converted basis) outstanding as of September 30, 2013, and excludes:

 

   

3,343,372 shares of common stock issuable upon the exercise of outstanding stock options as of September 30, 2013 pursuant to our 2000 Plan and our 2009 Plan at a weighted average exercise price of $2.85 per share;

 

   

3,266 shares of common stock issuable upon the settlement of restricted stock units as of September 30, 2013 pursuant to our 2009 Plan;

 

   

                 shares of common stock issuable upon the exercise of outstanding stock options issued after September 30, 2013 pursuant to our 2009 Plan at a weighted average exercise price of $            ;

 

   

                 shares of common stock reserved for future issuance under our 2009 Plan, as amended in connection with this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this benefit plan; and

 

   

            shares of common stock to be reserved for issuance under our ESPP, to be effective in connection with this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this benefit plan.

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. The pro forma net tangible book value of our common stock as of September 30, 2013 was $(671.0) million, or $(25.39) per share. Pro forma net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of outstanding shares of common stock, after giving effect to the conversion of all outstanding shares of preferred stock into 19,032,854 shares of common stock immediately prior to the closing of this offering.

After giving effect to (i) the conversion of all outstanding shares of preferred stock into 19,032,854 shares of common stock immediately prior to the closing of this offering, (ii) receipt of the net proceeds from our sale of             shares of common stock at an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and (iii) the application of $200 million of the net proceeds of this offering to repay amounts outstanding under our credit facilities, our pro forma as adjusted net tangible book value as of September 30, 2013 would have been approximately $         million, or $         per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to our existing stockholders and an immediate dilution of $         per share to investors purchasing common stock in this offering.

The following table illustrates this dilution on a per share basis to new investors:

 

Assumed initial public offering price per share

     $                

Pro forma net tangible book value per share as of September 30, 2013

   $ (25.39 )  

Increase in pro forma net tangible book value per share attributable to new investors purchasing shares in this offering

    
  

 

 

   

Pro forma as adjusted net tangible book value per share after giving effect to this offering

    
    

 

 

 

Dilution in pro forma net tangible book value per share to new investors in this offering

     $                
    

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $          per share would increase (decrease) the pro forma net tangible book value, as adjusted to give effect to this offering, by $         per share and the dilution to new investors by $         per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting estimated underwriting discounts and commissions. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares of common stock offered by us would increase (decrease) the pro forma net tangible book value, as adjusted to give effect to this offering, by approximately $         per share and the dilution to new investors by $         per share, assuming the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions. If the underwriters exercise their option to purchase additional shares of common stock in full, the pro forma net tangible book value per share, as adjusted to give effect to this offering, would be $         per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be $         per share.

 

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The table below summarizes as of September 30, 2013, on a pro forma as adjusted basis described above, the number of shares of our common stock, the total consideration and the average price per share (i) paid to us by our existing stockholders and (ii) to be paid by new investors purchasing our common stock in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average
Price

Per  Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     26,449,910                $                         $            

New investors

               $                  $     
  

 

 

    

 

 

   

 

 

    

 

 

   

Totals

        100.0      $ 100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

The total number of shares of our common stock reflected in the discussion and tables above is based on 26,449,910 shares of our common stock (including preferred stock on an as-converted basis) outstanding as of September 30, 2013, and excludes:

 

   

3,343,372 shares of common stock issuable upon the exercise of outstanding stock options as of September 30, 2013 pursuant to our 2000 Plan and our 2009 Plan at a weighted average exercise price of $2.85 per share;

 

   

3,266 shares of common stock issuable upon the settlement of restricted stock units as of September 30, 2013 pursuant to our 2009 Plan;

 

   

                 shares of common stock issuable upon the exercise of outstanding stock options issued after September 30, 2013 pursuant to our 2009 Plan at a weighted average exercise price of $            ;

 

   

                 shares of common stock reserved for future issuance under our 2009 Plan, as amended in connection with this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this benefit plan; and

 

   

        shares of common stock to be reserved for issuance under our ESPP, to be effective in connection with this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this benefit plan.

Sales by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to             shares, or     % of the total number of shares of our common stock outstanding after this offering, and will increase the number of shares held by new investors to shares, or     % of the total number of shares outstanding after this offering.

To the extent that any outstanding options are exercised, new options are issued under our stock-based compensation plans or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. If all outstanding options under our 2009 Plan as of September 30, 2013 were exercised, then our existing stockholders, including the holders of these options, would own     % and our new investors would own     % of the total number of shares of our common stock outstanding upon the closing of this offering.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following selected consolidated financial and other data should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as our audited consolidated financial statements and related notes included elsewhere in this prospectus. We have derived the consolidated statement of operations data for the years ended December 31, 2010, 2011 and 2012 and the consolidated balance sheet data as of December 31, 2011 and 2012 from our audited consolidated financial statements that are included elsewhere in this prospectus. We have derived the consolidated statement of operations data for the years ended December 31, 2008 and 2009 and consolidated balance sheet data as of December 31, 2008, 2009 and 2010 from our audited consolidated financial statements that are not included in this prospectus. We have derived the unaudited consolidated statement of operations data for the nine months ended September 30, 2012 and 2013 and the unaudited consolidated balance sheet data as of September 30, 2013 from our unaudited consolidated financial statements that are included elsewhere in this prospectus. Our unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which consist only of normal recurring adjustments, necessary for the fair statement of those unaudited consolidated financial statements. Our historical results are not necessarily indicative of the results to be expected in the future, and our interim results are not necessarily indicative of the results that should be expected for the full year or any other period.

 

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    Year Ended December 31,     Nine Months Ended
September 30,
 
    2008     2009     2010     2011     2012     2012     2013  
    (in thousands, except share and per share data)  

Consolidated Statement of Operations Data:

             

Professional service revenues

  $ 61,527      $ 112,187      $ 139,495      $ 113,279      $ 148,233      $ 94,892      $ 195,642   

Insurance service revenues

    356,037        607,196        766,695        727,111        870,828        601,967        959,246   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    417,564        719,383        906,190        840,390        1,019,061        696,859        1,154,888   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and operating expenses:

             

Insurance costs

    314,199        554,660        713,653        651,094        750,025        518,386        858,862   

Cost of providing services (exclusive of depreciation and amortization of intangible assets)(1)

    33,820        57,957        72,073        59,388        63,563        44,944        74,042   

Sales and marketing(1)

    24,316        37,173        46,454        38,087        59,931        39,377        79,387   

General and administrative(1)

    14,691        37,287        28,366        31,421        37,879        24,147        39,821   

Systems development and programming costs(1)

    7,173        9,850        15,045        15,646        16,718        11,893        15,140   

Amortization of intangible assets

    1,819        12,223        17,960        12,388        17,441        7,853        35,926   

Depreciation

    4,045        11,301        12,042        9,201        11,676        9,100        8,908   

Restructuring

           6,202        5,922        2,358                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

    400,063        726,653        911,515        819,583        957,233        655,700        1,112,086   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    17,501        (7,270     (5,325     20,807        61,828        41,159        42,802   

Other income (expense):

             

Interest expense

    (894     (3,681     (4,444     (751     (9,709     (2,835     (32,091

Other, net

    (70     (6     67        127        57        22        309   

Gain from acquisition

           23,350                                      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for (benefit from) income taxes

    16,537        12,393        (9,702     20,183        52,176        38,346        11,020   

Provision for (benefit from) income taxes

    7,078        (5,425     (100     4,646        20,344        15,386        3,880   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 9,459      $ 17,818      $ (9,602     15,537      $ 31,832      $ 22,960      $ 7,140   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stock:

             

Basic

  $ 0.65      $ 0.78      $ (2.58   $ 0.68      $ 1.33      $ 0.97      $ 0.29   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 0.62      $ 0.76      $ (2.58   $ 0.65      $ 1.26      $ 0.92      $ 0.27   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common stock outstanding:

             

Basic

    3,702,284        3,683,188        3,727,195        3,921,341        4,902,692        4,728,686        5,750,789   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    4,490,190        4,507,563        3,727,195        5,051,990        6,238,046        6,002,628        7,598,197   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income (loss) per share:

             

Basic

          $ 1.33        $ 0.29   
         

 

 

     

 

 

 

Diluted

          $ 1.26        $ 0.27   
         

 

 

     

 

 

 

Pro forma weighted average common stock outstanding:

             

Basic

            23,935,546          24,783,643   
         

 

 

     

 

 

 

Diluted

            25,270,900          26,631,051   
         

 

 

     

 

 

 

 

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    Year Ended December 31,     Nine Months Ended
September 30,
 
    2008     2009     2010     2011     2012     2012     2013  
    (in thousands)  

Other Financial Data:

 

Net Insurance Service Revenues(2)

  $ 41,838      $ 52,536      $ 53,042      $ 76,017      $ 120,803      $ 83,581      $ 100,384   

Net Service Revenues(3)

  $ 103,365      $ 164,723      $ 192,537      $ 189,296      $ 269,036      $ 178,473      $ 296,026   

Adjusted EBITDA(4)

  $ 26,520      $ 20,174      $ 29,797      $ 47,348      $ 95,362      $ 61,530      $ 92,305   

Adjusted Net Income(5)

  $ 12,344      $ 15,354      $ 13,174      $ 28,788      $ 45,133      $ 29,695      $ 33,242   

 

(1) Includes stock-based compensation expense as follows:

 

    Year Ended December 31,     Nine Months Ended
September 30,
 
  2008     2009     2010     2011     2012     2012     2013  
  (in thousands)  

Cost of providing services (exclusive of depreciation and amortization of intangible assets)

  $ 354      $ 318      $ 467        438      $ 516      $ 382      $ 770   

Sales and marketing

    359        486        670        637        500        364        882   

General and administrative

    2,306        2,868        3,385        3,590        3,144        2,505        2,371   

Systems development and programming costs

    206        254        531        160        200        145        337   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

  $ 3,225      $ 3,926      $ 5,053      $ 4,825      $ 4,360      $ 3,396      $ 4,360   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(2) Net Insurance Service Revenues is a non-GAAP financial measure that we calculate as insurance service revenues less insurance costs. For more information about Net Insurance Service Revenues and a reconciliation of Net Insurance Service Revenues to insurance service revenues, the most directly comparable financial measure calculated and presented in accordance with GAAP, see “—Non-GAAP Financial Results.”

 

(3) Net Service Revenues is a non-GAAP financial measure that we calculate as the sum of professional service revenues and Net Insurance Service Revenues. For more information about Net Service Revenues and a reconciliation of Net Service Revenues to total revenues, the most directly comparable financial measure calculated and presented in accordance with GAAP, see “—Non-GAAP Financial Results.”

 

(4) Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss), excluding the effects of our income tax provision (benefit), interest expense, depreciation, amortization of intangible assets and stock-based compensation expense. For 2009, we also excluded gain associated with our acquisition of Gevity. For more information about Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP, see “—Non-GAAP Financial Results.”

 

(5) Adjusted Net Income is a non-GAAP financial measure that we calculate as net income (loss), excluding the effects of stock-based compensation, amortization of intangible assets and the income tax effect of these pre-tax adjustments at our effective tax rate. For 2009, we also excluded the gain associated with our acquisition of Gevity and the income tax effects of this pre-tax adjustment at our effective tax rate. For more information about Adjusted Net Income and a reconciliation of Adjusted Net Income to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP, see “—Non-GAAP Financial Results.”

 

     As of December 31,     As of
September 30,
2013
 
     2008     2009      2010      2011     2012    
     (in thousands)  

Consolidated Balance Sheet Data:

              

Cash and cash equivalents

   $ 28,834      $ 37,742       $ 45,535       $ 31,620      $ 63,749      $ 112,161   

Working capital

   $ 21,173      $ 37,604       $ 44,280       $ 26,424      $ 27,380      $ 85,541   

Total assets

   $ 142,354      $ 390,274       $ 339,964       $ 335,369      $ 887,727      $ 1,215,597   

Notes payable and borrowings under capital leases

   $ 11,930      $ 55,008       $ 1,798       $ 1,683      $ 301,334      $ 820,610   

Total liabilities

   $ 95,455      $ 258,017       $ 214,190       $ 241,771      $ 830,407      $ 1,448,163   

Convertible preferred stock

   $ 59,059      $ 122,878       $ 122,878       $ 122,878      $ 122,878      $ 122,878   

Total stockholders’ equity (deficit)

   $ (12,160   $ $9,379       $ 2,896       $ (29,280   $ (65,558   $ (355,444

 

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Non-GAAP Financial Results

We use Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income to provide an additional view of our operational performance. Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income are financial measures that are not prepared in accordance with GAAP. We define Net Insurance Service Revenues as insurance service revenues less insurance costs, which include the premiums we pay to insurance carriers for the health and workers compensation insurance coverage provided to our clients and WSEs and the reimbursements we pay to the insurance carriers for claim payments within our insurance deductible layer. We define Net Service Revenues as the sum of professional service revenues and Net Insurance Service Revenues. We define Adjusted EBITDA as net income (loss), excluding the effects of our income tax provision (benefit), interest expense, depreciation, amortization of intangible assets and stock-based compensation expense. We define Adjusted Net Income as net income (loss), excluding the effects of stock-based compensation, amortization of intangible assets and the income tax effect of these pre-tax adjustments at our effective tax rate. For 2009, we also excluded the gain associated with our acquisition of Gevity from Adjusted EBITDA and Adjusted Net Income, and excluded the income tax effect of this pre-tax adjustment at our effective tax rate from Adjusted Net Income, as we consider these to be non-recurring items.

We believe that the use of Net Insurance Service Revenues provides useful information as it presents a measure of revenues from our provision of insurance services to our clients that eliminates the cost of insurance. We believe that Net Service Revenues provides a useful measure of total revenues for the two main components of our revenues calculated on a consistent basis. We believe that the use of Adjusted EBITDA and Adjusted Net Income provides additional period-to-period comparisons and analysis of trends in our business, as they exclude certain one-time and non-cash expenses. We believe that Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income are useful for our stockholders and board of directors by helping them to identify trends in our business and understand how our management evaluates our business. We use Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income to monitor and evaluate our operating results and trends on an ongoing basis and internally for operating, budgeting and financial planning purposes, in addition to allocating our resources to enhance the financial performance of our business and evaluating the effectiveness of our business strategies. We also use Net Service Revenues and Adjusted EBITDA in determining the incentive compensation for management.

Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income are not prepared in accordance with, and should not be considered in isolation of, or as an alternative to, measurements required by GAAP. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. As non-GAAP measures, Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. In particular:

 

   

Net Insurance Service Revenues and Net Service Revenues are reduced by the insurance costs that we pay to the insurance carriers;

 

   

Adjusted EBITDA does not reflect interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

 

   

Adjusted EBITDA does not reflect the amounts we paid in taxes or other components of our tax provision;

 

   

Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

   

Adjusted EBITDA and Adjusted Net Income do not reflect changes in, or cash requirements for, our working capital needs;

 

   

Adjusted EBITDA and Adjusted Net Income do not reflect the non-cash component of employee compensation;

 

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Although depreciation and amortization of intangible assets are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and

 

   

Other companies in our industry may calculate Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, you should consider Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income alongside other financial performance measures, including total revenues, net income (loss) and our financial results presented in accordance with GAAP.

The table below sets forth a reconciliation of GAAP insurance service revenues to Net Insurance Service Revenues:

 

    Year Ended December 31,     Nine Months Ended
September 30,
 
    2008     2009     2010     2011     2012     2012     2013  
    (in thousands)  

Insurance service revenues

  $ 356,037      $ 607,196      $ 766,695      $ 727,111      $ 870,828      $ 601,967      $ 959,246   

Less: insurance costs

    314,199        554,660        713,653        651,094        750,025        518,386        858,862   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Insurance Service Revenues

  $ 41,838      $ 52,536      $ 53,042      $ 76,017      $ 120,803      $ 83,581      $ 100,384   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The table below sets forth a reconciliation of GAAP total revenues to Net Service Revenues:

 

    Year Ended December 31,     Nine Months Ended
September 30,
 
    2008     2009     2010     2011     2012     2012     2013  
    (in thousands)  

Total revenues

  $ 417,564      $ 719,383      $ 906,190      $ 840,390      $ 1,019,061      $ 696,859      $ 1,154,888   

Less: insurance costs

    314,199        554,660        713,653        651,094        750,025        518,386        858,862   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Service Revenues

  $ 103,365      $ 164,723      $ 192,537      $ 189,296      $ 269,036      $ 178,473      $ 296,026   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The table below sets forth a reconciliation of GAAP net income (loss) to Adjusted EBITDA:

 

    Year Ended December 31,     Nine Months Ended
September 30,
 
    2008     2009     2010     2011     2012     2012      2013  
    (in thousands)  

Net income (loss)

  $ 9,459      $ 17,818      $ (9,602   $ 15,537      $ 31,832      $ 22,960       $ 7,140   

Provision for (benefit from) income taxes

    7,078        (5,425     (100     4,646        20,344        15,386         3,880   

Stock-based compensation

    3,225        3,926        5,053        4,825        4,360        3,396         4,360   

Interest expense

    894        3,681        4,444        751        9,709        2,835         32,091   

Depreciation

    4,045        11,301        12,042        9,201        11,676        9,100         8,908   

Amortization of intangible assets

    1,819        12,223        17,960        12,388        17,441        7,853         35,926   

Gain from acquisition

           (23,350                                    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Adjusted EBITDA

  $ 26,520      $ 20,174      $ 29,797      $ 47,348      $ 95,362      $ 61,530       $ 92,305   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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The table below sets forth a reconciliation of GAAP net income (loss) to Adjusted Net Income:

 

    Year Ended December 31,     Nine Months Ended
September 30,
 
    2008     2009     2010     2011     2012     2012     2013  
    (in thousands)  

Net income (loss)

  $ 9,459      $ 17,818      $ (9,602   $ 15,537      $ 31,832      $ 22,960      $ 7,140   

Stock-based compensation

    3,225        3,926        5,053        4,825        4,360        3,396        4,360   

Amortization of intangible assets

    1,819        12,223        17,960        12,388        17,441        7,853        35,926   

Gain from acquisition

           (23,350                                   

Income tax impact of pre-tax adjustments at the effective tax rate

    (2,159     4,737        (237     (3,962     (8,500     (4,514     (14,184
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income

  $ 12,344      $ 15,354      $ 13,174      $ 28,788      $ 45,133      $ 29,695      $ 33,242   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in the section titled “Risk Factors.”

Overview

TriNet is a leading provider of a comprehensive human resources solution for small to medium-sized businesses, or SMBs. We enhance business productivity by enabling our clients to outsource their HR function to one strategic partner and allowing them to focus on operating and growing their core businesses. Our HR solution includes services such as payroll processing, human capital consulting, employment law compliance and employee benefits, including health insurance, retirement plans and workers compensation insurance. Our services are delivered by our expert team of HR professionals and enabled by our proprietary, cloud-based technology platform, which allows our clients and their employees to efficiently conduct their HR transactions anytime and anywhere.

We utilize a co-employment model pursuant to which both we and our clients become employers of our clients’ employees, which we refer to as worksite employees, or WSEs. This model affords us a close and embedded relationship with our clients and their employees. Under the co-employment model, employment-related liabilities are contractually allocated between us and our clients. We assume responsibility for, and manage the risks associated with, each clients’ employee payroll obligations, including the liability for payment of salaries and wages to each client employee, the payment of payroll taxes and, at the client’s option, responsibility for providing group health, welfare, workers compensation and retirement benefits to such individuals. Unlike a payroll service provider, we issue each WSE a payroll check drawn on our bank accounts and contract with insurance carriers to provide health and workers compensation insurance to WSEs under TriNet’s name.

We serve thousands of clients in specific industry vertical markets, including technology, life sciences, property management, professional services, banking and financial services, retail, manufacturing and hospitality services, as well as non-profit entities. As of September 30, 2013, we served over 8,000 clients in 47 states, the District of Columbia and Canada states and co-employed approximately 218,000 WSEs. In 2012, we processed over $10 billion in payroll and health insurance premiums for our clients.

Our total revenues consist of professional service revenues and insurance service revenues. For 2012 and the nine months ended September 30, 2013, 15% and 17% of our total revenues, respectively, consisted of professional service revenues, and 85% and 83% of our total revenues, respectively, consisted of insurance service revenues. We earn professional service revenues by processing HR transactions, such as payroll and employment tax withholding, and providing labor and benefit law compliance services, on behalf of our clients. We earn insurance service revenues by providing risk-based, third-party plans to our clients, primarily employee health benefit plans and workers compensation insurance.

For professional service revenues, we recognize as revenues the fees we earn for processing HR transactions, which fees do not include the payroll that is paid to us by the client and paid out to WSEs or remitted as taxes. We recognize as insurance service revenues all insurance-related billings and administrative fees collected from clients and withheld from WSEs for risk-based insurance plans provided through third-party insurance carriers, primarily employee health insurance and workers compensation insurance. We in turn pay premiums to third-party insurance carriers for these insurance benefits, as well as reimburse them for claim payments within our insurance deductible layer. These premiums and reimbursements are classified as insurance costs on our statements of operations. To augment our financial information prepared in accordance with U.S. generally accepted accounting principles, or GAAP, we use internally a non-GAAP financial measure, Net Insurance Service Revenues, which consists of insurance service revenues less insurance costs. We also use a

 

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measure of total non-GAAP revenue, or Net Service Revenues, which is the sum of professional service revenues and Net Insurance Service Revenues. For 2012 and the nine months ended September 30, 2013, 55% and 66% of our Net Service Revenues, respectively, consisted of professional service revenues and 45% and 34% of our Net Service Revenues, respectively, consisted of Net Insurance Service Revenues.

We sell our services primarily through our direct sales force, which consists of sales representatives who focus on serving clients in specific industry vertical markets. For 2010, 2011 and 2012, our sales and marketing expenses were $46.5 million, $38.1 million and $59.9 million, respectively, or 5%, 5% and 6% of our total revenues and 24%, 20% and 22% of our Net Service Revenues, respectively. For the nine months ended September 30, 2012 and 2013, our sales and marketing expenses were $39.4 million and $79.4 million, or 6% and 7% of our total revenues and 22% and 27% of our Net Service Revenues, respectively.

We have made significant investments in our proprietary, cloud-based technology platform, including implementing client information and management software to provide our clients with enhanced features and functionality with which to conduct their HR transactions, manage their employees and analyze employee benefits data. For 2010, 2011 and 2012, our systems development and programming costs were $15.0 million, $15.6 million and $16.7 million, or 2%, 2% and 2% of our total revenues and 8%, 8% and 6% of our Net Service Revenues, respectively. For the nine months ended September 30, 2012 and 2013, our systems development and programming costs were $11.9 million and $15.1 million, or 2% and 1% of our total revenues and 7% and 5% of Net Service Revenues, respectively.

Recent Acquisitions

We operate in a highly fragmented industry and have completed numerous strategic acquisitions over the course of the past decade. We intend to continue to pursue strategic acquisitions that will enable us to add new clients and employees to our existing business and offer our clients and their employees more comprehensive and attractive services. Our recent acquisitions are listed below:

 

   

In July 2013, we acquired Ambrose Employer Group, LLC, which we refer to as Ambrose, a New York-based company that provides premium HR services primarily to WSEs in the financial services industry in the New York area. Through our acquisition of Ambrose, we acquired approximately 13,000 WSEs, approximately 1,000 clients and 12 sales representatives.

 

   

In October 2012, we acquired South Carolina-based SOI Holdings, Inc., which we refer to as SOI, which expanded our presence in the property management and food services industry vertical markets. Through our acquisition of SOI, we acquired approximately 66,000 WSEs, approximately 1,500 clients and 92 sales representatives.

 

   

In May 2012, we acquired Los Angeles-based technology company App7, Inc., which does business under the name of, and which we refer to as, ExpenseCloud, which enabled us to enhance our technology platform with additional expense management capabilities.

 

   

In April 2012, we acquired Oklahoma-based 210 Park Avenue Holding, Inc., which does business under the name of, and which we refer to as, Accord, through which we expanded our presence in the hospitality and manufacturing industry vertical markets. Through our acquisition of Accord, we acquired approximately 14,000 WSEs, approximately 500 clients and 8 sales representatives.

 

   

In June 2009, we acquired Florida-based Gevity HR Inc., which we refer to as Gevity, which has provided us with insurance and risk-management expertise and a national presence through its East Coast processing facility. Through our acquisition of Gevity, we acquired approximately 92,000 WSEs and approximately 6,000 clients. Following our acquisition of Gevity, we elected to change the pricing terms with certain of Gevity’s clients, terminate Gevity’s relationships with certain of its clients, significantly restructure Gevity’s and our combined sales forces and migrate all of Gevity’s WSEs to our technology platform. As a result of these actions, our revenues fell short of our expectations in 2010 and declined in 2011, and we incurred restructuring charges of $6.2 million, $5.9 million and $2.4 million in the years ended December 31, 2009, 2010 and 2011, respectively.

 

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Key Operating Metrics

We regularly review certain key operating metrics to evaluate growth trends, measure our performance and make strategic decisions. Our key operating metrics at December 31, 2010, 2011 and 2012 and at September 30, 2012 and 2013 were as follows:

 

     Year Ended December 31,      Nine Months Ended
September 30,
 
     2010      2011      2012      2012      2013  

Key Operating Metrics:

              

Total WSEs

     96,816         83,314         174,311         104,747         218,069   

Total Sales Representatives

     114         80         224         149         301   

Net Insurance Service Revenues (in thousands)

   $ 53,042       $ 76,017       $ 120,803       $ 83,581       $ 100,384   

Net Service Revenues (in thousands)

   $ 192,537       $ 189,296       $ 269,036       $ 178,473       $ 296,026   

Total WSEs

We define Total WSEs at the end of a given fiscal period as the total number of WSEs paid in the last calendar month of the fiscal period. We believe that comparing our Total WSEs at the end of a fiscal period to that of prior periods is an indicator of our success in growing our business, both organically and through the integration of acquired businesses, and retaining clients, and that our Total WSEs paid in the last calendar month of the fiscal period is a leading indicator of our anticipated revenues for future fiscal periods.

Total Sales Representatives

Our direct sales force consists of sales representatives who focus on serving clients in specific industry vertical markets. We define Total Sales Representatives at the end of a given fiscal period as the total number of our direct sales force employees at that date. We believe that comparing our Total Sales Representatives at the end of a fiscal period to our Total Sales Representatives at the end of a prior fiscal period is an indicator of our success in growing our business, and that our Total Sales Representatives at the end of recent fiscal periods is a key indicator of our ability to increase our revenues in the following fiscal periods.

Net Insurance Service Revenues and Net Service Revenues

We define Net Insurance Service Revenues as insurance service revenues less insurance costs. We define Net Service Revenues as the sum of professional service revenues and Net Insurance Service Revenues. Our total revenues on a GAAP basis represent the total amount invoiced by us to our clients, net of direct pass-through costs such as payroll and payroll tax payments, for the services we provide to our clients. Our insurance costs include the premiums we pay to insurance carriers for the health and workers compensation insurance coverage provided to our clients and WSEs and the reimbursements we pay to the insurance carriers for claim payments within our insurance deductible layer. We act principally as the service provider to add value in the execution and procurement of these services to our clients. Net Insurance Service Revenues is the primary indicator of our ability to source, add value and offer benefit services to WSEs through third-party insurance carriers, and is considered by management to be a key performance measure. We believe that Net Service Revenues is also a key performance measure as it provides a useful measure of total revenues for the two main components of our revenues calculated on a consistent basis. In addition, management believes measuring operating costs as a function of Net Service Revenues provides a useful metric, as we believe it enables better evaluation of the performance of our business.

Seasonality

Historically, we have experienced our highest monthly addition of WSEs, as well as our highest monthly levels of client attrition, in the month of January, primarily because clients that change their payroll service providers tend to do so at the beginning of a calendar year. In addition, we experience higher levels of client attrition in connection with renewals of the health insurance we provide for our WSEs, in the event that such renewals result in increased premiums that we pass on to our clients. We have also historically experienced higher insurance claim volumes in the second and third quarters of a fiscal year than in the first and fourth quarters of a fiscal year, as WSEs typically

 

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access their health care providers more often in the second and third quarters of a fiscal year, which has negatively impacted our insurance costs in these quarters. These historical trends may change, and other seasonal trends may develop that make it more difficult for us to manage our business.

Basis of Presentation and Key Components of Our Results of Operations

Total Revenues

Our total revenues consist of professional service revenues and insurance service revenues.

We earn professional service revenues by processing HR transactions, such as payroll and employment tax withholding, payment to WSEs, and labor and benefit law compliance, on behalf of our clients. Our clients pay us these fees based on either a fixed fee per WSE per month or per transaction, or a percentage of the WSE’s payroll cost, pursuant to written professional services agreements that are generally cancelable by us or our clients upon 30 days’ prior written notice. We also earn professional service revenues by providing strategic HR services to our clients, such as talent acquisition, performance management and time and expense reporting services. Our clients pay us professional service fees for these services based on separate written agreements.

We earn insurance service revenues by providing risk-based, third-party plans to our clients, primarily employee health benefit plans and workers compensation insurance. Insurance service revenues consist of insurance-related billings and administrative fees. We recognize as insurance service revenues insurance-related billings and administrative fees collected from clients and withheld from WSEs for risk-based insurance plans provided through third-party insurance carriers, primarily employee health insurance and workers compensation insurance. We in turn pay premiums to third-party insurance carriers for these insurance benefits, as well as reimburse them for claim payments within our insurance deductible layer. These premiums and reimbursements are classified as insurance costs on our statements of operations.

Our clients pay us administrative fees, typically based on a percentage of insurance-related amounts, collected from clients and withheld from WSEs, primarily in exchange for our administration of employee health benefit plans.

Insurance Costs

Insurance costs include the premiums we pay to the insurance carriers for the health and workers compensation insurance coverage provided to the clients and WSEs and the reimbursements we pay to the insurance carriers for claim payments made to the WSEs within the insurance deductible layer.

Our insurance costs are, in part, a function of the type and terms of agreements that we enter into with the insurance carriers that provide fully-insured coverage for our WSEs. We estimate that approximately 40% of our 2013 health insurance premiums are for policies with respect to which our carriers set the premiums and we are not responsible for any deductible. Our future premiums under these, or ensuing, policies will be influenced by the WSE claims activity in prior periods. The remainder of the health insurance policies and all of the workers compensation insurance policies that we provide to our clients are policies with respect to which we agree to reimburse our carriers for any claims that they pay within our deductible layer. Under these policies, WSEs file claims with the carriers, which are responsible for paying the claims up to the maximum coverage under the policies. The carriers then seek reimbursement from us up to our deductible per incident for workers compensation claims, or up to a cap for health insurance claims in accordance with the terms of the underlying health insurance policies. In no event are we liable to pay the claims directly to WSEs. As we evaluate the claims experience for each fiscal period, we adjust, as we deem necessary, our workers compensation and health benefits reserves, and this in turn has a corresponding impact on our insurance costs. As a result, our insurance costs fluctuate from period to period depending on the number and severity of the claims incurred by our WSEs.

Cost of Providing Services

Cost of providing services consists primarily of costs incurred by us associated with direct customer support, such as payroll and benefits processing, professional HR consultants, employee liability insurance and

 

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costs associated with defending clients in employment-related legal claims, benefits and risk management, postage and shipping expenses and consulting expenses.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of salaries, commissions and related variable compensation expenses, commission payments to partners and the cost of marketing programs. Marketing programs consist of advertising, lead generation, marketing events, corporate communications, brand building and product marketing activities, as well as various incentivized partnership and referral programs. We expect our sales and marketing expenses to continue to increase, both in absolute dollars and as a percentage of our total revenues on an annual basis, for the foreseeable future as we expand our sales force and our other sales and marketing efforts to build our brand, although these expenses may fluctuate as a percentage of our total revenues from period to period depending on the timing of those expenses.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation-related expenses, legal and other professional services fees and other general corporate expenses. We expect our general and administrative expenses to continue to increase in absolute dollars for the foreseeable future due to increases in our legal and financial compliance costs in connection with becoming a public company, although these expenses may fluctuate as a percentage of our total revenues from period to period depending on the timing of those expenses.

Systems Development and Programming Costs

Systems development and programming costs consist primarily of compensation-related expenses for our employees and contractors dedicated to systems development and programming, as well as fees that we pay to third-party consulting firms. We expect our systems development and programming costs to continue to increase modestly in absolute dollars for the foreseeable future as we continue to invest in and improve our technology platform. However, over time, we expect our systems development and programming costs to remain relatively consistent as a percentage of our total revenues on an annual basis, although these costs may fluctuate as a percentage of our total revenues from period to period depending on when we incur those costs.

Amortization of Intangible Assets

Amortization of intangible assets represents costs associated with an acquired company’s developed technologies, client lists, trade names and contractual agreements. We amortize these intangibles over their respective estimated useful lives using either the straight-line method or the accelerated method.

Depreciation

Depreciation consists primarily of amortization of the cost of software and furniture, fixtures and equipment.

Restructuring

Restructuring costs consist of severance and placement costs, lease termination costs and other exit costs associated with the restructuring described in “—Recent Acquisitions” above.

Other Income (Expense)

Other income (expense) consists primarily of interest expense under our credit facility and capital leases.

Provision for (Benefit from) Income Taxes

We are subject to taxation in the United States and Canada. However, we conduct our business primarily in the United States. Our effective tax rate differs from the statutory rate primarily due to state taxes, tax credits and

 

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changes in uncertain tax positions. We make estimates and judgments about our future taxable income based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially affected.

Income taxes are computed using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Changes in valuation allowances are reflected as a component of provision for (benefit from) income taxes.

Results of Operations

The following tables set forth our results of operations for the periods presented and as a percentage of our total revenues and Net Service Revenues for those periods. Period-to-period comparisons of our financial results are not necessarily indicative of financial results to be achieved in future periods.

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2010     2011     2012     2012     2013  
     (in thousands)  

Consolidated Statement of Operations:

        

Professional service revenues

   $ 139,495      $ 113,279      $ 148,233      $ 94,892      $ 195,642   

Insurance service revenues

     766,695        727,111        870,828        601,967        959,246   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     906,190        840,390        1,019,061        696,859        1,154,888   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and operating expenses:

          

Insurance costs

     713,653        651,094        750,025        518,386        858,862   

Cost of providing services (exclusive of depreciation and amortization of intangible assets)

     72,073        59,388        63,563        44,944        74,042   

Sales and marketing

     46,454        38,087        59,931        39,377        79,387   

General and administrative

     28,366        31,421        37,879        24,147        39,821   

Systems development and programming costs

     15,045        15,646        16,718        11,893        15,140   

Amortization of intangible assets

     17,960        12,388        17,441        7,853        35,926   

Depreciation

     12,042        9,201        11,676        9,100        8,908   

Restructuring

     5,922        2,358                        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

     911,515        819,583        957,233        655,700        1,112,086   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (5,325     20,807        61,828        41,159        42,802   

Other income (expense):

          

Interest expense

     (4,444     (751     (9,709     (2,835     (32,091

Other, net

     67        127        57        22        309   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for (benefit from) income taxes

     (9,702     20,183        52,176        38,346        11,020   

Provision for (benefit from) income taxes

     (100     4,646        20,344        15,386        3,880   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (9,602   $ 15,537      $ 31,832      $ 22,960      $ 7,140   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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      Year Ended December 31,     Nine Months Ended
September 30,
 
          2010             2011             2012             2012             2013      
     (as a percentage of total revenues)  

Professional service revenues

     15     13     15     14     17

Insurance service revenues

     85        87        85        86        83   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     100     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and operating expenses:

          

Insurance costs

     79        77        74        74        74   

Cost of providing services (exclusive of depreciation and amortization of intangible assets)

     8        7        6        6        6   

Sales and marketing

     5        5        6        6        7   

General and administrative

     3        4        4        3        3   

Systems development and programming costs

     2        2        2        2        1   

Amortization of intangible assets

     2        1        2        1        3   

Depreciation

     1        1        1        1        1   

Restructuring

     1                               
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

     101        98        94        94        96   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (1     2        6        6        4   

Other income (expense):

          

Interest expense

                   (1            (3

Other, net

                                   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for (benefit from) income taxes

     (1     2        5        6        1   

Provision for (benefit from) income taxes

            1        2        2          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (1 )%      2     3     3     1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
         2010             2011             2012             2012             2013      
     (as a percentage of Net Service Revenues)  

Professional service revenues

     72     60     55     53     66

Net Insurance Service Revenues

     28        40        45        47        34   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Service Revenues

     100     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other operating expenses:

          

Cost of providing services (exclusive of depreciation and amortization of intangible assets)

     37        31        24        25        25   

Sales and marketing

     24        20        22        22        27   

General and administrative

     15        17        14        14        13   

Systems development and programming costs

     8        8        6        7        5   

Amortization of intangible assets .

     9        7        6        4        12   

Depreciation

     6        5        4        5        3   

Restructuring

     3        1                        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other operating expenses

     103        89        77        77        86   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (3     11        23        23        14   

Other income (expense):

          

Interest expense

     (2            (4     (2     (11

Other, net

                                   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for (benefit from) income taxes

     (5     11        19        21        4   

Provision for (benefit from) income taxes

            2        8        9        1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (5 )%      8     12     13     2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Nine Months Ended September 30, 2012 and 2013

Total Revenues

 

     Nine Months Ended
September 30,
     Change
2013 vs. 2012
 
     2012      2013      $      %  
     (in thousands, except percentages)  

Professional service revenues

   $ 94,892       $ 195,642       $ 100,750         106

Insurance service revenues

     601,967         959,246         357,279         59
  

 

 

    

 

 

    

 

 

    

Total revenues

   $ 696,859       $ 1,154,888       $ 458,029         66
  

 

 

    

 

 

    

 

 

    

 

     Nine Months Ended
September 30,
     Change
2013 vs. 2012
 
     2012      2013      #      %  

Key operating metrics:

           

Total WSEs

     104,747         218,069         113,322         108

Total Sales Representatives

     149         301         152         102

Total revenues for the nine months ended September 30, 2013 increased $458.0 million, or 66%, compared to the same period in 2012. Professional service revenues for the nine months ended September 30, 2013 increased $100.8 million, or 106%, compared to the same period in 2012. Of this amount, $76.8 million was attributable to our acquisitions of SOI, Ambrose and Accord. The remaining growth was primarily due to a 22% increase in Total WSEs (excluding WSEs added as a result of our acquisitions of SOI and Ambrose) and a 6% increase in average professional service revenues per WSE other than those acquired from SOI and Ambrose.

Insurance service revenues for the nine months ended September 30, 2013 increased by $357.2 million, or 59%, compared to the same period in 2012 primarily due to $219.9 million from our acquisitions of SOI, Ambrose and Accord, an increase in Total WSEs other than those acquired from SOI and Ambrose, and a 2% increase in average insurance service revenues per WSE other than those acquired from SOI and Ambrose.

Total WSEs at September 30, 2013 increased by approximately 113,000, or 108%, compared to Total WSEs at September 30, 2012, with approximately 81,000 of such increase due to the SOI and Ambrose acquisition. The remaining growth in Total WSEs was primarily driven by a net increase in total clients other than those acquired from SOI and Ambrose. Our Total Sales Representatives increased from 149 at September 30, 2012 to 301 at September 30, 2013, 104 of which we acquired from SOI and Ambrose.

Insurance Costs

 

     Nine Months Ended
September 30,
     Change
2013 vs. 2012
 
     2012      2103      $      %  
     (in thousands, except percentage)  

Insurance costs

   $ 518,386       $ 858,862       $ 340,476         66

Insurance costs increased $340.5 million, or 66%, compared to the same period in 2012, primarily due to $219.4 million from our acquisitions of SOI, Ambrose and Accord. The remaining increase resulted from an increase in Total WSEs other than those acquired from SOI and Ambrose and a 2% increase in average insurance costs per WSE other than those acquired from SOI and Ambrose.

 

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Net Insurance Service Revenues and Net Service Revenues

 

     Nine Months Ended
September 30,
     Change
2013 vs. 2012
 
     2012      2013      $      %  
     (in thousands, except percentages)  

Insurance service revenues

   $ 601,967       $ 959,246       $ 357,279         59

Less: Insurance costs

     518,386         858,862         340,476         66
  

 

 

    

 

 

    

 

 

    

Net Insurance Service Revenues

   $ 83,581       $ 100,384       $ 16,803         20
  

 

 

    

 

 

    

 

 

    

 

     Nine Months Ended
September 30,
     Change
2013 vs. 2012
 
     2012      2013      $      %  
     (in thousands, except percentages)  

Total revenues

   $ 696,859       $ 1,154,888       $ 458,029         66

Less: Insurance costs

     518,386         858,862         340,476         66
  

 

 

    

 

 

    

 

 

    

Net Service Revenues

   $ 178,473       $ 296,026       $ 117,553         66
  

 

 

    

 

 

    

 

 

    

For the reasons set forth above, our Net Insurance Service Revenues for the nine months ended September 30, 2013 increased $16.8 million, or 20%, as compared to the same period in 2012, and our Net Service Revenues for the nine months ended September 30, 2013 increased $117.6 million, or 66%, as compared to the same period in 2012.

Other Operating Expenses

 

     Nine Months Ended
September 30,
     Change
2013 vs. 2012
 
     2012      2013      $     %  
     (in thousands, except percentages)  

Cost of providing services

   $ 44,944       $ 74,042       $ 29,098        65

Sales and marketing

     39,377         79,387         40,010        102

General and administrative

     24,147         39,821         15,674        65

System development and programming costs

     11,893         15,140         3,247        27

Amortization of intangible assets

     7,853         35,926         28,073        357

Depreciation

     9,100         8,908         (192     (2 %) 
  

 

 

    

 

 

    

 

 

   

Total other operating expenses

   $ 137,314       $ 253,224       $ 115,910        84
  

 

 

    

 

 

    

 

 

   

Cost of Providing Services

 

     Nine Months Ended
September 30,
     Change
2013 vs. 2012
 
     2012      2013      $      %  
     (in thousands, except percentages)  

Compensation-related costs

   $ 31,398       $ 52,777       $ 21,379         68

Facilities

     2,880         3,711         831         29

Information technology and communication

     3,488         5,809         2,321         67

Other expenses

     7,178         11,745         4,567         64
  

 

 

    

 

 

    

 

 

    

Total cost of providing services

   $ 44,944       $ 74,042       $ 29,098         65
  

 

 

    

 

 

    

 

 

    

Cost of providing services for the nine months ended September 30, 2013 increased by $29.1 million, or 65%, compared to the same period in 2012, primarily due to our acquisitions of SOI and Ambrose. Compensation-related costs increased by $21.4 million due to increased headcount, including $14.7 million from our acquisitions of SOI and Ambrose. Facilities-related costs increased by $0.9 million due to our acquisition of SOI, partly offset by a reduction in expense associated with a renegotiation of certain lease terms. The remainder of the increase was due to an increase in WSEs other than those that we acquired from SOI and Ambrose.

 

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Sales and Marketing

 

     Nine Months Ended
September 30,
     Change
2013 vs. 2012
 
     2012      2013      $      %  
     (in thousands, except percentages)  

Compensation-related costs

   $ 25,065       $ 52,506       $ 27,441         109

Marketing and advertising

     1,376         2,494         1,118         81

Facilities

     6,091         11,414         5,323         87

Other expenses

     6,845         12,973         6,128         90
  

 

 

    

 

 

    

 

 

    

Total sales and marketing

   $ 39,377       $ 79,387       $ 40,010         102
  

 

 

    

 

 

    

 

 

    

Sales and marketing expenses for the nine months ended September 30, 2013 increased by $40.0 million, or 102%, compared to the nine months ended September 30, 2012. Of this increase, $27.4 million was attributable to compensation-related costs, $15.5 million of which was attributable to increased headcount mainly from our acquisitions of SOI and Ambrose and $11.9 million of which was attributable to growth in our direct sales channel, primarily the addition of new sales representatives. The remaining increase in sales and marketing expenses was primarily attributable to marketing and advertising expenses, which increased by $1.1 million, or 81%, mainly from our acquisitions of SOI and Ambrose. In addition, facilities-related expenses increased by $5.3 million, or 87%, primarily due to our acquisitions of SOI and Ambrose, and partly offset by reduction in expense associated with a renegotiation of certain lease terms. Other expenses increased by $6.1 million, or 90%, primarily due to increased sales travel, meeting and conference activities, as well as increased expenses associated with recruiting efforts and information technology spending to support the growth of our sales organization.

General and Administrative

 

     Nine Months Ended
September 30,
     Change
2013 vs. 2012
 
     2012      2013      $      %  
     (in thousands, except percentages)  

Compensation-related costs

   $ 14,850       $ 24,566       $ 9,716         65

Legal and professional fees

     2,969         5,655         2,686         90

Other expenses

     6,328         9,600         3,272         52
  

 

 

    

 

 

    

 

 

    

Total general and administrative

   $ 24,147       $ 39,821       $ 15,674         65
  

 

 

    

 

 

    

 

 

    

General and administrative expenses for the nine months ended September 30, 2013 increased by $15.7 million, or 65%, primarily due to increased headcount resulting from our acquisitions of SOI and Ambrose and increased legal, professional services and other corporate expenses resulting from these acquisitions and related integration efforts.

Systems Development and Programming

 

     Nine Months Ended
September 30,
     Change
2013 vs. 2012
 
     2012      2013      $      %  
     (in thousands, except percentages)  

Compensation-related costs

   $ 8,906       $ 11,246       $ 2,340         26

Other expenses

     2,987         3,894         907         30
  

 

 

    

 

 

    

 

 

    

Total systems development and programming costs

   $ 11,893       $ 15,140       $ 3,247         27
  

 

 

    

 

 

    

 

 

    

Our systems development and programming costs for the nine months ended September 30, 2013 increased by $3.2 million, or 27%, compared to the same period in 2012. Of this increase, $1.3 million was primarily attributable to increased headcount from our acquisitions of SOI and Ambrose. The remaining increase was

 

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primarily due to a $1.0 million increase in compensation-related costs resulting from the increase in headcount other than those we acquired from SOI to support and enhance our technology product delivery.

Amortization of Intangible Assets and Depreciation

 

     Nine Months Ended
September 30,
     Change
2013 vs. 2012
 
     2012      2013      $     %  
     (in thousands, except percentages)  

Amortization of intangible assets

   $ 7,853       $ 35,926       $ 28,073        357

Depreciation

   $ 9,100       $ 8,908       $ (192     (2 %) 

Our amortization of intangible assets for the nine months ended September 30, 2013 increased by $28.1 million, or 357%, compared to the same period in 2012. Such increase was primarily attributable to our acquisitions of SOI and Ambrose. Depreciation expense for the nine months ended September 30, 2013 decreased by $0.2 million, or 2%, compared to the same period in 2012, primarily attributable to accelerated depreciation recorded in 2012 as a result of our assessment of changes in the extent and manner that certain fixed assets were expected to be used, offset by an increase in depreciation from our acquisitions of SOI and Ambrose.

Other Income (Expense)

 

     Nine Months Ended
September 30,
    Change
2013 vs. 2012
 
     2012     2013     $     %  
     (in thousands, except percentage)  

Interest expense

   $ (2,835   $ (32,091   $ (29,256     1,032

In March 2012, we obtained a $140.0 million senior secured credit facility, which was amended and restated in October 2012 to provide for total borrowings of $350.0 million, and amended again in April 2013 to provide for total borrowings of $500.0 million. In August 2013, we entered into a new senior secured credit facility for total borrowings of $820.0 million to pay off our previous credit facilities and pay a special dividend. We wrote off $11.4 million of unamortized loan fees in connection with the repayment of the credit facility in August 2013. Interest expense increased correspondingly with the increased indebtedness.

Provision for Income Taxes

 

     Nine Months Ended
September 30,
    Change
2013 vs. 2012
 
     2012     2013     $     %  
     (in thousands, except percentages)  

Provision for income taxes

   $ 15,386      $ 3,880      $ (11,506     (75 %) 

Effective tax rates

     40.1     35.2    

Provision for income taxes for the nine months ended September 30, 2013 decreased by $11.5 million compared to the same period in 2012, primarily due to a decrease in pre-tax income. Our effective tax rate decreased from 40.1% for 2012 to 35.2% for 2013, primarily due to release of uncertain tax positions as a result of statute expirations and a retroactive law change in 2013, allowing for recognition of tax credits for 2012.

 

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Years Ended December 31, 2010, 2011 and 2012

Total Revenues

 

     Year Ended December 31,      Change
2011 vs. 2010
    Change
2012 vs. 2011
 
     2010      2011      2012      $         %         $      %  
     (in thousands, except percentages)  

Professional service revenues

   $ 139,495       $ 113,279       $ 148,233       $ (26,216     (19 %)    $ 34,954         31

Insurance service revenues

     766,695         727,111         870,828         (39,584     (5 %)      143,717         20
  

 

 

    

 

 

    

 

 

    

 

 

     

 

 

    

Total revenues

   $ 906,190       $ 840,390       $ 1,019,061       $ (65,800     (7 %)    $ 178,671         21
  

 

 

    

 

 

    

 

 

    

 

 

     

 

 

    

 

     Year Ended December 31,      Change
2011 vs. 2010
    Change
2012 vs. 2011
 
     2010      2011      2012      #         %         #      %  

Key operating metrics:

                  

Total WSEs

     96,816         83,314         174,311         (13,502     (14 %)      90,997         109

Total Sales Representatives

     114         80